If you thought an SDI was something nasty you’d pick up on a Club 18-30 holiday, think again. In Thomas Cook’s world, they’re Separately Disclosed Items and, sadly for Peter Fankhauser, you can’t get rid of them with a quick shot of penicillin.
Cook’s SDIs are losses that it has been parking to one side without accounting for them in its profits. Things such as bad debts from hotels that it’s never realistically going to get back. Or the cost of putting on extra flights to get customers home when the airlines Air Berlin and Niki went bust. Or the price of closing High Street shops.
Frankly, this stuff should have been put through the profit line long ago. Presumably, bonuses were paid on the back of the profits and share price that the manoeuvres flattered.
That seems to have been the view of newish auditor EY. Still reeling from millions of pounds and dollars of fines in Britain and the US for rubbish audit work, EY went over Cook’s books with a microscope after Fankhauser’s awful profit warning in September.
The accounting clean-up wiped an unexpected £30 million off Cook’s profits for the year.
Set alongside The Fank’s return to the theme of September’s warning — the hot English weather hitting summer bookings — and the result was a 30% hammering of the share price.
It’s not so long ago that Cook nearly went bust under the weight of catastrophically high debts. Today, it is still horribly indebted, and the picture’s not improving: from £40 million a year ago, today’s net debt stands at £389 million. Consider that the total value of its shares is only £513 million and Cook looks a decidedly risky prospect again.
We’re told not to worry about debts this time — Fankhauser recently managed to negotiate room for more breathing space on his banking covenants.
Would he have breached them without this extra headroom? Who knows, but when a company has to boast in the bulletpoints of a trading statement presentations that it’s “bank covenant compliant”, it’s never a good sign. Like a hotel advertising “hardly any bedbugs”.
In fairness to Fankhauser, he’s rightly trying to wean the company off its addiction to the low-margin, high-volume holidays most susceptible to the public’s weather-related whims.
He wants to build up the own-branded Casa Cook and Cook’s Club hotels where he can offer unique, higher-quality properties that make bigger profits.
But Cook’s debts mean he can only do that with the help of third party cash (a joint venture with Swiss hotelier LMEY) . So far, there are only 190 sites operating. That number’s growing, but the strategy still feels like jam tomorrow.
Elsewhere, the news today is full of how the past summer’s one-off heatwave will soon be a permanent fixture.
With that in mind, Thomas Cook’s stock looks like something nasty in a Malaga hotel pool. Best avoided.
