On a gloomy Friday morning, even the prospect of holidays in sunnier climes has failed to lift Thomas Cook and Tui Travel, with suggestions the former might need to call on shareholders for cash.
It is Morgan Stanley which has done the damage to the travel operators, with the bank downgrading its recommendations on both companies. Analyst Jamie Rollo said:
We downgrade our ratings on TUI Travel to equal weight and Thomas Cook to underweight and reduce our forecasts for both to reflect a weaker operating environment and more expensive debt refinancing.
Demand is still weak, costs pressures remain, and capacity is getting harder to cut. Cash generation has been poor and net debt has been growing. Debt refinancing needs are likely to be more expensive than the market thinks. The combination of these leads to 13-14% earnings per share cuts.
Tui and Thomas Cook have benefited from substantial merger synergies, which are now running out; significant capacity cuts, which we think are getting harder to deliver; and fuel hedges, which are now at less favourable rates. External risks are also growing...Low-cost carriers are expanding into medium-haul markets.Thomas Cook appears to us to have the most forecast risk as it has above-average margins and, we believe, needs to refinance its debts quicker than the market believes, potentially including new equity. Tui is our preferred tour operator, as we think it offers a more favourable risk-reward balance than Thomas Cook, and we like its scope for margin recovery and specialist holiday expansion. A better way to play Tui, in our view, could be via parent Tui AG, as at the current share price we calculate investors get its €2.7bn stake in Hapag-Lloyd for free.
So the two are the leading fallers in the FTSE 100 at the moment, with Thomas Cook down 8.5p to 210p and Tui off 5.3p at 249.9p.
But after three days of falls, the leading index is edging higher again, up 35.82 points at 5303.52 as miners - the volatile but influence sector - recover on firmer metal prices.
Fresnillo is up 24p at 895.5p, Lonmin has been lifted 40p to £17.25 and Kazakhmys has climbed 28p to £13.01.
