Nice accumulation of new flow over the last few days - one addition is around Sterling Holiday resort repaying Cumulative Convertible Debentures and extinguishing them. A shift in capital allocation where subsidiary is repaying capital to parent. If this trend is established in multiple subs (and Thomas Cook is home to many) and key shift in capital allocation decision making gets established. Markets generally reward those companies. In the last few days, dividend declared, repayment of capital from subsidiary starts adding some confidence. Can they keep this up?
Hi!! I had purchased Thomas cook as a value buy in Oct 21 and the revival in business has played out well for the stock. The overall business has also shown improvement in margins as cost reduction taken during pandemic were sustained post that. The profitability also changed as their acquisitions started contributing to the bottom line.
There still seems to be some room for outbound revival growth, but overall the value proposition in the stock has caught up as it has started trading above it’s long term average valuations. Hence, I was trying to analyse and see if the story is structural and there are any re-rating triggers…
Also analysing if there are any decent moats in the business or supply side dominance which would help them in their journey from here on.
Having said that sharing a few questions that come to my mind, if anyone can help answer those…
Industry…
The tourism industry is expected to grow at a rate of 10-12 % in the coming years, while digital platforms would grow faster than that. Would Thomas cook be able to grow faster than the industry growth?
Travel and travel related business… which forms majority of their revenue is a commodity (hence it’s contribution to EBIT is very low). The only moat businesses like these usually have is brand identity and distribution reach.
Even though Thomas cook remains a strong brand, but the likes of Makemytrip have also been able to establish themselves as a mighty competitor. Travel tech is an important part of the value chain, where growth is higher than the traditional channels; So is Thomas cooks’s platform good enough to compete with these companies in the long term?! And does the shift to digital narrow their distribution moat?
SOTC has been an established player in the outbound customised tour business. The packaged tour business current market penetration is 7.8%, is expected to reach 10% with 64.7m users. Would the growth in packaged holiday help them cement their position in the industry by creating supply side (hotels and airlines) dominance, giving them negotiation power?
Is there a way to compare the travel business of Thomas cook and Makeytrip? As the revenue break down which they both provide is largely different.
And at company level…
Their consolidated EBITDA has reached 8.5% in 9MFY23, which is a huge improvement from the past. But do one see it surpassing that?
At stock price level…
The stock is available at close to 1x P/S and 9x P/CFO, is there any re-rating possibility here?
The coverage on the stock pretty low, specially amongst FII due to low trading volumes. So even if the business growth continues how is the stock price growth supported in such situations? How do one look at the possibility of FII holding increasing in stocks like these.
Can someone tell how IDBI Trust sold 38000 shares at just 19.9lacs (i.e Rs.52 per share) on 20th Sept or 10,096 shared at 1.1 cr (Rs.1,124 per share) on 3rd Sept while market price is in range of 200 - 230 in this period? Similar with remaining transactions too
Thomas Cook has announced yesterday the proposal to demerge its wholly owned subsidiary Sterling Holiday Resorts into a listed company. However, the announcement says that the shareholders of TCIL will get 0.81 shaes for eery shares held in TCIL. I am unable to understand what will happen to the balance about 20 percent shares of SHRL. Seek the views of experienced investors . Does that mean the number of shares of Sterling will be equivalent to 81 percent of number of shares of Thomas Cook. Disclosure: Invested.
This is a fascinating play to me. I do not own the stock but it peaked my interest when I saw the promotor Fairfax Capital bought about 1% of the company in open market recently. I was thinking and looking at the results to see what exactly is happening and what is going on. I think the promotor thought process here like this.
Demerge the leisure and hospitality division to Sterling Holiday Resorts Limited
The share swap is 81 shares of SHRL for 100 shares of Thomas Cook. Basically, remove the asset heavy business from the equity light business of travel and forex. Capitalize on the fact that markets gives a median PE of 31 for hotel stocks or a Price to Pre-tax E of 40ish. According to latest filing SHRL has made a PBT of about 600 million rupees. With a 40 PBT multiple, that makes SHRL value about 24000 million rupees. TCIL currently according to Mr. Market is the market cap value of 52440 million rupees. This implies the equity light company that produces PBT of 1643 million rupees has a value of TCIL MCAP - SHRL Value = 28440 million rupees. So the non-SHRL TCIL businesses is valued then at a Price to PBT multiple of 17.31.
Conduct a reverse split in TCIL to 1 share for 4 shares.
Most likely combat the stock from going to single digits post merger, make sense.
Consolidate subsidiaries into TCIL.
Cleaner reporting. Lesser related party transactions. Lesser GST, reporting compliances and all.
Reduction of share capital by changing face value of stock from 4 rupees to 3 rupees.
I think this is a big thing actually because this improves the ROE but also increases the Debt to Equity ratio. Let’s take the hypothetical case of a company with share capital 100 crores, debt of 50 crores and generates a profit of 15 crores. So the company has a ROE of 15% and Debt to Equity ratio of 0.5. Lets say this company share face value of 4 rupees, means outstanding shares is 25 lakh shares. Now, if I am able to share face value of 3 rupees, then share capital drops to 75 lakhs. The new ROE becomes about 20% and Debt to Equity ratio becomes 0.66.
To conclude, I think the promotors are trying to do some housekeeping and trying to get an equity light travel and forex business at sub price to PAT multiple of 23 to 25 depending on the market valuing the hotel business.
Ofcourse, this is just my speculation. It would be really interesting to know what long term investors in the stock thinks and look for any chinks in my theory. I still don’t know if this is screaming value buy to be honest but it is interesting special situation never the less.
