This Turnaround Stock Could be the Poster Boy of the Travel Industry

Over the weekend I ran a screener with the intent to find turnaround stocks.

Two conditions need to be satisfied for an investment in turnaround stocks to be profitable.

First, the turnaround should be sustainable i.e. it should not be a one or two quarter thing.

Second, if everyone is expecting a turnaround or if everyone is talking about it, then there is no point investing in the stock because it has probably been priced in.

My filter gave me more than 100 stocks. I was particularly drawn to a stock which had all the qualities of a turnaround stock. It was also in a turnaround sector with all the possible tailwinds.

Now everyone is gung-ho about the travel and hospitality industry and rightly so. I thought why not look at a company which is a classic case of turnaround and is an indirect play on the travel industry?

My rationale is that most of the hotel stocks have already been discovered by the market. The stock that flashed on my screener was Thomas Cook.

Now Thomas Cook is a solid brand and a solid company. Unfortunately it was the biggest casualty of covid when travel, especially international, travel ceased.

We associate Thomas Cook as a tour operator but there is much more to the company. Not only does it offer travel services, but it also issues forex cards and provides remittance facilities. It also has a leisure resort under the famous brand of sterling holidays.

Apart from this, it gets a decent amount of revenue from a subsidiary, Digiphoto Entertainment Imaging ltd, which takes photos and videos of visitors at tourist attractions.

A remarkable turnaround

The company has had a remarkable turnaround over the past 3-4 quarters despite international travel not having fully resumed. China was a problem until the last quarter and Russia still remains a problem.

In terms of demand, most of the segments have recovered since Covid. Some segments like leisure, hospitality, and the digital imaging segment are doing better than pre-covid. In fact, most segments have reached 85-90% of pre-covid levels.

The two main segments are travel and digital photo which account for about 90% of revenues for Thomas Cook India.

The travel and related services have corporate travel, domestic and international holidays and meeting and conference travel.

The strongest recovery has been corporate travel where the margins are the highest while domestic holidays have recovered roughly to 90%.

I believe the growth trigger for the next few quarters is likely to be international holidays, which has recovered only 60% from the pre-covid level. International revenues should see a jump with peak travel season in this and the next quarter.

The next important segment is the digital photography segment. The growth here is directly proportional to international travel.

You name the attraction and tourist destination, and Digi Entertainment, Thomas Cooks subsidiary will have a tie up to click and process your photos. It has a presence in 19 countries.

Whether you are at universal studios or at a casino in Venetian at Macau or inside Burj Khalifa, the tallest building in the world, Digi Entertainment is a part of it.

The other two segments have a lower contribution with respect to sales but have high contribution to profitability. Basically, high ROCE business where the capital contribution in limited.

A pure analysis of the past 5-year numbers would never get you to invest in this stock. In fact, for most turnaround stocks to do well, it is quite mandatory for the company to be in deep red. In case of Thomas Cook, the turnaround has happened since the past 2-3 quarters.

While major reopening trades have tripled from the bottom, this stock has hardly doubled and is still available at inexpensive valuations.

Conclusion

Turnaround stocks are fraught with risks as the key to profits is in the sustainability of the turnaround.

The only rationale for investing in turnaround stocks is the risk reward ratio is favourable. This is mainly because of the valuations.

This is what investors should look at when considering the stock of Thomas Cook India.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)