Berenberg downgrades 'structurally challenged' Thomas Cook to 'sell'

Analysts at Berenberg downgraded Thomas Cook to 'sell' on Friday, citing continued weakness in the tour operator's operational performance and a "structurally challenged" business model.

Excluding an estimated £40m headwind from the European heatwave, this implied that underlying structural headwinds were "still somewhere around £100m".

"This means that TCG needs to find £100m of efficiencies in 2019 just to stand still," said Berenberg.

The German broker noted that, worryingly, there was no sign of things getting better for Thomas Cook.

"In our view, even allowing for the weather headwinds, 2018 appears to have been the most-demanding year since 2012," Berenberg's analysts said.

While they do not expect Thomas Cook to see a repeat of this year's heavy cash outflows, the leisure outfit's free cash flow is expected to "remain modest".

"Given the current performance, bond yields and cash flows, the existing capital structure may become unsustainable," the analysts said, slashing their target price on Thomas Cook shares from 36p to just 12p.

All in all, Berenberg sees tour operating as a "structurally challenged industry" and believes investors should take an "opportunistic approach" to the shares.

"TCG continues to face stiff competition from online travel agents and low-cost airlines. We do not yet see any end to the significant competitive pressures that undermine current performance."