Thomas Cook could pay dividend by 2015 - analysts

Thomas Cook Group could begin dividend payments by 2015 and have no debt by 2016, according to analysts.

The statement was made as the tour operator dropped almost 10% on Wednesday after its stock went ex-rights, with the new share capital totalling 496.6 million shares admitted to the London Stock Exchange at 08:00 BST.

Wednesday marked the completion of the balance sheet recapitalisation for Thomas Cook, with the company raising £425 million.

As a result, Karl Burns, analyst at Panmure Gordon, was of the view that the travel agent could "begin to repair the group's position reputation with suppliers, improving the hotel stock, whilst also renegotiating contracts with suppliers, further improving the group's working capital and cash flow".

He added: "Following the £425 million placing and rights issue and robust first-half cash flow, we believe by 2015, Thomas Cook could begin dividend payments and, by 2016, have no debt."

Trading "stabilising"

He stressed that the trading backdrop appeared to be stabilising following significant capacity cuts in the industry, particularly in the UK and France.

"Since 2007, we estimate the industry has reduced capacity in the UK by c. 30% and in France by c. 10%," Burns said. "Price inflation in the industry has returned, albeit aided by fairly poor summer weather over the last two years, in addition to favourable currency moves.

"However, with group-wide capacity moving into 2014 set to remain flat and yet demand seemingly increasing, we believe the outlook appears positive for Thomas Cook."

Cost inflation outlook "benign"

Burns' 'buy' recommendation on the stock also stemmed from his prediction that cost inflation excluding fuel in 2014 would be below general inflation of between 2% and 3%, aided by favourable currency hedging. "This, coupled with flat capacity into 2014, and recovering pricing power should offer solid ground for further improvements in margins and like-for-like profit growth," he commented.

Thomas Cook "attractive"

"We believe Thomas Cook remains highly attractive given the improving underlying trading backdrop, potential for additional cost savings (we estimate at least a further £155 million) and improving cash flow," Burns concluded.

"With a forecast compound average growth rate in earnings per share over the next three years of c. 70%, with earnings holding upside potential, we believe Thomas Cook offers exceptional value trading on a 2014 enterprise value/EBITDA [ratio] of 4.1 [times], below peer multiples.

"Therefore, we reiterate our 'buy' recommendation."