Thomas Cook and TUI slump on Citigroup downgrade

Tour operators Thomas Cook and TUI were under the cosh after Citigroup downgraded both to ‘sell’ from ‘neutral’, although the bank expects solid second-quarter statements from them.

The bank cut its forecasts on Thomas Cook amid ongoing earnings risk given an expected significant European airline capacity increase which could put pressure on prices.

It also pointed to a tightening supply/demand balance for hotels which could put pressure on costs.

Citi cut its price target on Thomas Cook to 80p from 120p as it lowered full year 2016/17 earnings per share estimates by 5% and 2% to reflect the weaker-than-expected trading highlighted in the first quarter statement.

Citi’s 2016 EPS forecasts are around 5% below consensus.

“Unlike its main peer Thomas Cook does not have a significant hotel and cruise business. This means that as the supply/demand balance for accommodation tightens it does not have a ready source of in house capacity nor a corresponding benefit from higher hotel/cruise profits to offset the cost pressures that the tour operator may see,” Citi said.

The bank slashed its price target for TUI to 885p from 1,250p.

“Although TUI guides to at least 10% per annum underlying EBITA growth we think that this likely falls to around 6% pa after allowing for FX and the likely disposal of the fast growing Hotelbeds business,” Citi said.

It said management appears confident of a good performance this year, despite strong growth in European airline capacity and higher hotel costs as consumers move away from North Africa/Turkey, but risks remain.

Citi said the implied multiple on the tour operating business of 7x EV/EBIT does not take account of these risks.

“Unless tour operators announce further capacity reductions (possibly with upcoming results), we think both companies could test trough multiples again, pointing to further downside.”

At 1227 GMT, Thomas Cook shares were down 5% to 96.56p and TUI was 5.5% lower at 987.99p.