Thomas Cook - Tommy has a new girlfriend

Thomas Cook: So, the old ‘un has a new girlfriend after over 170 years of romantic twists and turns. The newbie is a twenty-something year old Chinese conglomerate, Fosun. They are taking a 5% stake in Thomas Cook at a cost of £91.8m, (which works out at 125.59p per share) and are looking to buy more shares in the open market to take the stake to 10%. As well as offering stronger financial backing, the deal opens the door to deepening existing relationships with Fosun’s recently acquired ClubMed business, an acceleration of the rollout of Thomas Cook’s Concept Hotel brand and the chance to better access the Chinese tourism market. It sounds as if existing shareholders pushed back on a proposal for the entire 10% stake to be via new shares, due to the dilutive effect.

The shares rocketed up on Friday’s news, settling today around 145p. Whilst Fosun build their stake, I guess the shares will be underpinned around here. At this level a possible 12.5p of earnings this year (to 30^th September 2015) is a PE of 11.6x, with maybe 15.5p in FY2016 being 9.4x a year out. These are using pre-deal forecasts with the group implying some eps enhancement in FY2015 and then further benefits in FY2016, which some seem think too over-ambitious a timeline. Anyway, with debt coming down and the balance sheet stabilising a return to the dividend list looks likely this year, albeit a token amount. However, a conservative three times cover in FY2016, leads to a possible 5.2p dividend that year for a yield of 3.6%. This looks ahead of consensus, so I might be getting carried away, but the potential is there. Longer term, the question is whether Fosun will want full ownership. Due to EU rules, Thomas Cook would have to get rid of their airline business on a non-European takeover, but that may suit them anyway. So the real question is how long investors might have to wait. It may be a while, but with Thomas Cook on the mend and a new girlfriend on its arm, patience should be rewarded. (Neil Cumming^, 9^th March 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower