Thomas Cook – Are sum of parts greater than M-cap
Below is a post based an edited note to Insider Subscribers
Thomas Cook (TC) now is a mini holding company which has multiple lines of businesses (a company which has 53 subsidiaries ) – A business analyst’s nightmare
Investment in TC is investment in Prem Watsa who has tremendous record of long term wealth creation, although I was not happy when he started a new fund in 2015 to invest in India in parallel to TC, cause at time of acquiring TC he commented that all new investments in India will be via TC however in his recent letter to shareholders he has made it clear that only related business (read travel and hospitality) will be acquired by TC rest would go to Fairfax India as much as possible
Over time Fairfax Financial would prefer to have all of its Indian investments (as far as possible) in Fairfax India with the exception of Thomas Cook and its subsidiaries, Quantum Advisors and ICICI Lombard General Insurance Company Limited.
The management had said that they would not prefer one over another however this year’s chairman’s letter made it clear that non travel business would go Fairfax India way,This fact is not hidden from Mr Market after formation of new entity in last two years shares of Fairfax India have gone up by 70% compared to 11% for Thomas Cook India ( INR 220/ share at time of writing the note)
How are the various subdivisions faring ?
Travel business revenues went up by 80% to 3900 Crore in FY17 , however, bottom-line had lower growth due to the acquisition of KUONI made last year. This is a cash generating segment of the company and cash generated from this segment is used to fund acquisitions or fix other businesses. Management indicated in concall that once the acquisition is integrated it can earn 7-8% net margin in this segment
It was a difficult year for Sterling Resorts (FY17). While revenues grew by 23%, driven largely by room sales to non-members, a large one-time provision for receivables and higher resort level expenses resulted in a net loss for the year although the figure was less than last year. The company its changing is sales mix and management has indicated that this business would turn to profitability soon (read 12-18 months)
Quess corp is now listed subsidiary of Thomas Cook (62%) ownership , It had a very good year with revenue growing 26% and net earnings 22%. The growth was driven by increases in headcount of 30% in the People and Services business and 23% in Global Technology Solutions and the sustained turnaround of MFX and Brainhunter in North America. Quess continues on acquistion spree to meet its ambitious 2020 goal
Is sum of parts greater than m-cap?
Let me show you some numbers for academic exercise
|Unit||Value (INR Cr)|
|Quess Corp||3410||62% ownership, Considering a steep 50% holding company discount|
|Travel Business||4800||Considering a steady stage margin of 8% and PE of 15 and no future growth|
|Current M-Cap (Aug 2017)||8000||At time of sending note|
At current market cap
- market is assigning Zero value to Sterling Holidays
- Assuming no growth of Travel business which earns ROCE of 100%
- taking a 50% haircut in Quess’s value
Finally, I leave you with few excerpts from Prem Watsa letters to his shareholders, (emphasis mine)
It has been about four years since we invested in Thomas Cook and its subsidiaries. We initially invested $172.7 million, purchasing shares from Thomas Cook U.K. and others at approximately 52 rupees per share. Since that time, Thomas Cook has acquired Kuoni and Luxe Asia for $81 million to become the leader by a wide margin in high-end travel to and from India, with travel operations also in Hong Kong and Sri Lanka. Free cash flow generated from these operations has in the last four years amounted to $129.8 million, with an average annual cash return on net assets since purchase of 12.8%. Excellent performance by Madhavan Menon, the Chairman and CEO of Thomas Cook.
Book value per share of Thomas Cook has grown from 21 rupees in 2012 to 65 rupees, up 210% over four years. With Quess at market value, Thomas Cook’s book value per share at year-end was 200 rupees, an increase of 847% in four years. We are very excited about Thomas Cook and its prospects in India.