1. Company Profile
Thomas Cook Group Plc operates within the tourism and travel industry. The Company owns, operates and manages travel agencies, tour operators and car hire agencies, as well as owning their own aircraft fleet, cruise ships and resort properties. Thomas Cook is known as one of the largest travel companies in Europe.
2. Financial Analysis
The Thomas Cook Group has reported a robust set of results for the 2009 and 2010 financial years despite the uncertain economic environment and the significant adverse impact of a weak sterling pound. Thomas Cook‘s revenue for the year decreased by4% to £8,890million (5% deduction at constant currency).
This annual decrease mainly reflects a planned reduction in winter capacity in anticipation of challenging market and economic conditions. Thomas Cook’s Management estimates the lost revenue associated with the volcanic ash cloud to be around £100million
As shown by the statement of profit and loss accounts (see Appendix 1), the company's revenue fell by 4% in 2010 compared with the revenue in 2009, but in general, the structure of the profit and loss statement for 2010 maintains the structure of the profit and loss statement in 2009 (Thomas Cook Group Plc Annual Report and Accounts 2011).
Detailed structure of the company balance sheet statements as at 30th September 2009 and 30th September 2010, are given in Appendix 2. In general, significant changes in the items of the company's balance sheet were not detected, except for a sharp increase (almost in 3times) in long-term debt in 2010 as compared to the same in 2009. This is because in April 2010, the Thomas Cook Group issued a €400 million bond maturing in June 2015 and a £300 million bond maturing in June 2017. Proceeds of these issues were used to repay debt drawn under the existing bank facilities.
In May 2010, the Thomas Cook Group entered into a £1,050 million committed bank facilities agreement with a number of banks, maturing in May 2013. The previous bank facilities were cancelled (Thomas Cook Group Plc Annual Report and Accounts 2011).
The new facilities comprise a £200m term loan, repayable in annual installments of £50m commencing October 2011, and a revolving credit facility of £850m to support the seasonal liquidity requirements and the general corporate purposes of the Group. At the end of 2010, the average remaining maturity of the bond and committed bank facilities was 3.7 years (2009: 1.8 years).
In addition to debt facilities, the Group has a requirement for guarantee and bonding facilities, principally for consumer protection guarantees. In May 2010, the Thomas Cook Group entered into a total of £200million of new committed guarantee facilities with seven banks and, at the same date, the previous committed guarantee facilities totaling €200million (£174million) were cancelled. The new guarantee facilities mature in May 2012 (Thomas Cook Group Plc Annual Report and Accounts 2011).
Appendix 3 presents the coefficients of the profitability of Thomas Cook Group Plc and Tui Travel Plc. Comparative analysis of the profitability of companies Tomas Cook and Tui Travel shows the huge difference of gross profit margin and operating margin. The profitability coefficient indicators of Thomas Cook are considerably higher (nearly in3times) than those of its main competitor (Thomas Cook Group Plc Annual Report and Accounts 2011).
It should be noted that over the past two years (2009 and 2010), indicators of gross profit margin of both companies are stable and are as follows: for Thomas Cook the coefficients of gross profit margin are 23.20% and 23.57% for 2010 and 2009 respectively; for Tui Travel the coefficients of gross profit margin are 8.86% and 8.83% for 2010 and 2009 respectively (TUI Travel Plc 2010 Annual Report and Accounts 2011). The low gross margin means that the costs of services of the competitor are higher than the cost of services of Thomas Cook Group Plc.
Indicators of the operating margin of Thomas Cook also outperformed the indicators of operating margin of Tui Travel Plc in about three times. For Thomas Cook Plc, the coefficients of operating profit margin are 1.69% and1.88% for 2009 and 2010 respectively and for Tui Travel the coefficients of operating profit margin are 1.15% and -0.04% for 2009 and 2010 respectively. The low operating margin of Tui Travel Plc is the result of low gross margin, rather than increasing commercial and administrative expenses (Thomas Cook Group Plc Annual Report and Accounts 2011) (TUI Travel Plc 2010 Annual Report and Accounts 2011).
2.2. Operational efficiency
Assets turnover ratio reflects the rate of asset turnover and shows the number of assets revolutions of the period and measures the efficiency of a company's use of its assets in operating profit (Chatton &Gill 2000). According to Appendix 4, Thomas Cook’s coefficients of assets turnover are 1.31% and 1.29% for 2009 and 2010 respectively and Tui Travel’s coefficients of assets turnover are 1.15% and -0.04% for 2009 and 2010 respectively (TUI Travel Plc 2010 Annual Report and Accounts 2011). The value of assets turnover coefficients indicates that Thomas Cook Group Plc uses the assets slightly less efficiently than its main rival Tui Travel Plc (Thomas Cook Group Plc Annual Report and Accounts 2011).
Return on capital employed (ROCE) ratio is calculated as the ratio of profit from operations to total assets, and shows how profit from operations exceeds the value of assets (Helferst 2001). Appendix 5shows that Thomas Cook ‘s ROCE is 2.22% and 2.42% for 2009 and 2010 respectively while Tui Travel ROCE for the same two periods is -0.05% and 0.88% respectively. The Return on Capital Employed of Tui Travel Plc is approximately 1/3 of the same ratio of Thomas Cook Group Plc (TUI Travel Plc 2010 Annual Report and Accounts 2011).
Another important indicator of company performance is the operating profit. It should be noted that despite the higher revenue of Tui Travel Plc of £ 13.863 billion, operation profit is only £ 81 million, an operating margin of 0.66% (TUI Travel Plc 2010 Annual Report and Accounts 2011). Although at a lower value than its competitor, the company's revenues of Thomas Cook at £ 8.890 billion have an operating profit is £ 167 million, a 1.88% operating margin, indicating the high costs and low profitability of Tui Travel Plc.
Thomas Cook’s operating profit in the 2010 financial year amounted to £167 million, a reduction of £49.6 million on the prior year despite the impact of the volcanic ash cloud which cost the company an estimated £52.9 million. The direct costs associated with the volcanic ash cloud in April 2010 mounted to £52.9 million and included additional accommodation and subsistence costs for customers stranded in resort and the costs of customer repatriation when the airspace was eventually re-opened (Thomas Cook Group Plc Annual Report and Accounts 2011).
The most important finding of the comparative analysis of profitability and return is the existence of a relatively low level of return for Tui Travel Plc in conjunction with a sufficient indicator of its Operating Profit of 2010, which confirms the low efficiency. The company’s Return on Capital Employed and return on assets further confirms the conclusion made in paragraph 2.2 (TUI Travel Plc 2010 Annual Report and Accounts 2011).
Return of Thomas Cook Group Plc outperformed its main competitor, which proves it to be the more efficient in its use of assets and capital employed although its revenue is lower than that of Tui Travel Plc.
2.4. Financial Leverage
The Current Ratio measures whether or not a firm has enough resources to pay its debts over the next 12 months. Current Ratio is calculated as the ratio of all amounts of current assets to current liabilities of the Company (Rees 2008). According to Appendix 6, Thomas Cook‘s Current Ratios are 0.40: 1 and 0.43: 1 for 2009 and 2010 respectively and Tui Travel’s coefficients of assets turnover are 0.54: 1and 0.54: 1 for 2009 and 2010 respectively. The current ratio of Tui Travel Plc is a little better the current ratio of Thomas Cook Group Plc, but in general, these figures are almost similar for both companies (Thomas Cook Group Plc Annual Report and Accounts 2011).
Financial leverage or debt ratios measure a business firm's ability to meet its long-term debt obligations, that is, those with a maturity of more than one year. According to the calculations of this ratio in Appendix 6 for the two periods of 2009 and 2010, Thomas Cook Group Plc has better debt to equity ratios of 2.96 and 3.11for the years 2009 and 2010 respectively, compared to the same indicators of Tui Travel Plc of 4.69 and 4.18 for 2009 and 2010 respectively (TUI Travel Plc 2010 Annual Report and Accounts 2011).
The gearing ratio measures the percentage of capital employed that is financed by debt and long term finance. As evident from Appendix 6, Thomas Cook‘s gearing ratio (non-current liabilities to shareholder’s funds) in 2009 has better value than the same ratio for Tui Travel Plc which is at67.1% against 84.4% for Thomas Cook Plc, but in 2010 this gearing ratio deteriorated due an increase of about 3 times of Thomas Cook’s long-term borrowings (Thomas Cook Group Plc Annual Report and Accounts 2011).
The interest cover ratio is a measurement of the number of times a company can make its interest payments with its earnings before interest and taxes. Thomas Cook’s interest cover ratios are 0.87 and 0.93for 2009 and 2010 respectively while Tui Travel’s interest cover ratios are 0.66 and -0.03and for 2009 and 2010 respectively.
The interest cover ratio may indicate a certain empowerment of debt financing, as evident in Thomas Cook Group Plc. A low interest cover figure could reduce financial flexibility as it is in Tui Travel Plc. It makes it possible to increase the return on equity by increasing this ratio.
3. Earnings per share and Dividends
Appendix 7 shows the positive dynamics of Thomas Cook‘s EPS figures and negative dynamics of Tui Travel’s EPS figures. Thomas Cook‘s EPS are and 25.93 and 16.21 2009 and 2010 respectively while Tui Travel’s EPS are -4.8 and -7.8for 2010 and 2009, respectively(Thomas Cook Group Plc Annual Report and Accounts 2011) (TUI Travel Plc 2010 Annual Report and Accounts 2011).
Earning per share (EPS) is a financial measure equal to the ratio of net profit of the company available for distribution to the annual average number of ordinary shares (Black & Gilson 1998). As shown in Appendix 7, there is no profit to distribute for shareholders since EPS figures for 2010 and 2009 for Tui Travel Plc were negative (TUI Travel Plc 2010 Annual Report and Accounts 2011).
The total dividend for the year ended 30th September 2010 represents Thomas Cook’s payout ratio of 47% of adjusted diluted earnings per share and is in line with its policy of paying between 40% and 50% of adjusted earnings by way of dividend (Thomas Cook Group Plc Annual Report and Accounts 2011).
Thomas Cook’s adjusted underlying basic earnings per share was 22.8 pence (2009 restated: 25.0 pence) and the basic loss per share is 0.3 pence (2009 restated earnings per share: 0.8 pence).The Board of Directors of Thomas Cook had recommended a final dividend of 7.0pence per share which would bring the total dividend per share for the full year to 10.75pence and which would make it unchanged from the previous year’s total dividend (Thomas Cook Group Plc Annual Report and Accounts 2011).
Dividend cover ratio is calculated as the basic earnings per share (basic EPS) divided by the annual total dividend amount per share (Cumming & Johan 2005). A company whose dividend cover ratio is 1.0 pays out all earnings in dividends.
According to Appendix 7, Tomas Cook’s dividend Cover ratios are 2.41 and 1.51 for 2009 and 2010 respectively while Tui Travel’s dividend cover ratios are -0.44 and -0.54 for 2009 and 2010 respectively. Thomas Cook’s final dividends for 2010 were approved, and were paid on 7 April 2011 to shareholders who are on the register as at 18 March 2011(Thomas Cook Group Plc Annual Report and Accounts 2011).
According to the financial analysis, Thomas Cook Group Plc outperforms its main rival. Financial Ratios of Thomas Cook present a more attractive picture to investors. If an investor is making a decision whether to invest his money in Thomas Cook stocks, first of all he will be interested in financial stability and real indicators such as EPS and Dividend Cover which are more attractive than those if its main competitor. The same figures of its competitor, Tui Travel Plc are lower in comparison. Both companies are international and bear virtually the same risks.
5. Market Data
Appendix 8 shows Bloomberg data. Thomas Cook is a public company with daily quotations of its shares. Evaluation of the Thomas Cook Plc can be done by using a quoted market price or comparing the ratios such as the P/S, P/E, P/B, and EV/EBITDA and other relevant ratios (Bloomberg 2011). Tui Travel is not a public company, and is part owned by the TUI AG group. Tui Travel Plc is 54.92% owned by TUI AG (Bloomberg 2011). TUI AG offers tourism and logistic services, and manufactures building materials. The Company operates airlines, travel agencies, cruise ships, resorts, and hotels. TUI provides maritime and inland container shipping, freight forwarding and storage services around the world, and leases and sells mobile buildings. TUI AG has daily quotations of its shares (see Appendix 8).
Thus, the evaluation of Tui Travel Plc by using company competitive approach is not possible. The most accurate valuation approach of the company will be the method of Discounted Cash Flow which makes it more complicated to evaluate for the investor.
Based on the solid financial analysis fundamentals, Thomas Cook Group is well positioned and has made progress in last two years and is likely to act the same way and undertake a wide range of strategic initiatives to be the market leader.
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