LONDON (Reuters) - Thomas Cook has scrapped its dividend following a string of profit warnings and said it was confident of a deal with lenders ahead of a key test of its financial health in December, lifting its shares.
Europe’s second biggest tour operator, whose chief executive stepped down in August, said it was looking to cut its debt substantially over the next 2-3 years.
“The group is focussed on improving its financial flexibility, particularly around the seasonal cash low point at the end of December. We are working closely and constructively with our banking group to achieve this. The board is confident that agreement will be reached shortly,” it said on Thursday.
Thomas Cook faces a test of its banking covenants in December — at a time when its cash inflow is usually weak because it is a quiet time for bookings.
Finance director Paul Hollingworth told Reuters the company was negotiating a new agreement which would include relaxing the criteria for the test.
“The primary thing is making sure we are building in substantial and sufficient headroom in terms of covenants that people stop asking the question,” Hollingworth said, adding he expected to secure a deal by the end of October.
Under the current criteria, Thomas Cook’s net debt must be no more than 3.75 times EBITDA. “People can do their own calculations and work out it could get tight,” Hollingworth said.
Peel Hunt analyst Nick Batram welcomed the moves, saying: “Management does appear to have grasped the enormity of the issue and has made a number of steps in the right direction.”
Thomas Cook shares, which had lost nearly 90 percent of their value over the past 18 months, were up 7.0 percent to 39.45 pence at 9:42 a.m. to be the biggest riser among London’s top 350 stocks.
The company has also started a disposal programme to bring down net debt which stood at 1.1 billion pounds ($1.7 billion) in March. It said it had raised 40 million pounds of its targeted 200 million proceeds.
Hollingworth declined to rule out the possibility of the company reverting to a rights issue to bolster its finances, adding he did not expect to pay dividends in the short term until the balance sheet was in a “far stronger position.”
Thomas Cook said it expected underlying operating profit to be broadly in line with expectations. It said results in July and August had been in line with expectations but September had been more challenging, particularly in its French business.
The company has been hit hard by tough trading conditions in Britain where its core customer base of families with young children has been hit hard by tough economic conditions.
It said in July earnings before interest and tax (EBIT) would be around 320 million pounds this year, compared with a forecast at the time for 380 million.
The forecast for 2011 EBIT is now 315 million pounds, according to a Thomson Reuters I/B/E/S poll.
Hollingworth said he would consider a similar performance in 2012 to be a very good result.
Rival TUI Travel, which owns the Thomson and First Choice chains, said last week it was on track to meet full-year profit expectations.
Reporting by Matt Scuffham; Editing by Rhys Jones and Dan Lalor