Just two days before it was scheduled to publish full year results Thomas Cook delivers yet another profits warning. The first two pushed the shares -74% from 2018’s 150p peak to its 39p trough. Today’s hat-trick-maker has lopped off another 20% (-32% at day lows ), undoing some of the late October bounce above 50p, putting them back below 40p and proving that the “rule of three” isn’t always good.

It’s curious how late in the day this warning lands; hard to believe the issues only came to light yesterday/over the weekend. 2018’s long hot UK summer dealt the shares a blow in September as management admitted holidaymakers had stayed at home, requiring heavy discounting to encourage them to pack their bags.

But this isn’t to blame today. A hot summer was acknowledged for making 2018 a tough year, but today’s warning actually stems from “a number of legacy and non-recurring charges to underlying EBIT.”

Divisionally, Airline profits of £35m was never going to counter an £88m loss for Tour Operator. And those “legacy and non-recurring charges” of £28m (£14m hotel receivables, £4m flight disruptions, £10m transformation costs) explain almost all of today’s warning/difference.

So long as they are indeed non-recurring, today’s share price reaction may even be overdone. Although why they aren’t grouped as exceptionals (they have been reclassified from Separately Disclosed Items/SDIs) along with a £24m balance sheet adjustment for irrecoverables, instead of being put though the profit line, is unclear.

Full year revenues +6% like-for like to £9.6bn is nothing to be ashamed of. As the saying goes, however, “revenues are vanity, profits are sanity”. So underlying EBIT (Earnings Before Interest & Tax) of £250m, now £30m below previous downwardly revised guidance (£280m), takes the decline for the year from -9% to -19% form 2017’s £308m base. A tough pill to swallow for shareholders.

2019 is still being advertised as “delivering progress on underlying EBIT”, but it may be a year or two before profits recover the 2017 base line from which 2018 guidance began and from which it was cut several times. Might this explain the “primary focus now moving to reported operating profit” as opposed to “underlying profit” (thankfully coupled with cash generation), pivoting to an easier reference point?

Which brings me to my last point. If “revenues are vanity” and “profits are sanity” the complete adage has it that “cash flow is reality”. And free cash flow of £148m is materially lower than last year (~£300m less), even allowing for seasonality, dented by lower profits, higher cash costs, investment (new hotel fund) and delayed winter bookings swaying working capital.

The result is net debt of £389m, well above the seasonally adjusted forecast, impacted significantly by “non-cash adjustments for FX and finance lease extensions” (£141m) as well as delayed bookings. But surely it was obvious that most of this was going to rear its ugly head in FY results?

Even more worrying from a balance sheet perspective, perhaps, is management seeing it necessary to clarify that “lenders remain supportive” and that it had “secured additional flexibility to ensure we can continue our strategic plan”.

Does this imply stress? Are this winter and next summer’s bookings looking that bad as Brexit looms? The dividend may not have been anything to write a postcard home about (1.1% est yield), but it’s been suspended to preserve cash. Perhaps because it was so minimal and unlikely to cause outcry.

We may be nearing Christmas, but the this travel group is getting no break from an annus horribilis that has reversed two years of recovery which had itself reversed two years of declines. It is a seasonal business, after all.

Mike van Dulken, Head of Research, 27 Nov 2018