ShoreCap sees 'exciting potential' in Thomas Cook's China partnership

After Thomas Cook confirmed that Fosun International, the Chinese conglomerate that recently snaffled France's Club Med, has invested £92m via a new share issue, Shore Capital maintained its 'hold' stance on the UK travel group but hailed the "exciting" potential.

With Fosun taking a 5% stake in new shares and planning to up this to 10% on the open market, the pair have formed a strategic partnership to accelerate Thomas Cook's existing growth strategy through better access into China and closer co-operation with France's Club Med.

The cash proceeds of the investment will be used to be used by Thomas Cook to accelerate strategic investment and reduce leverage, with the company saying its expects the investment to be earnings accretive in 2016, which Shore suggested meant at least £10m of additional profit.

"The Thomas Cook investment case is simple," said analyst Greg Johnson, "lower distribution costs and sell product that customers want, which is effectively the group’s Wave 2 plan. Attempting the former increases the importance of the latter as bluntly highlighted by the sharp underlying profit decline over the last two years."

The analyst sees the announcement as "potentially exciting", given current concerns over the company's product quality, which the Club Med's array of four- and five-star resorts will help improve.

As his investment thesis requires signs of a stabilisation in underlying trading to enable investors to focus on the £400m of Wave 2 efficiencies, "of which none currently appears to be factored into the price".

"Today’s announcement might increase investor confidence in Cook’s ability to stabilise underlying trading. However, we are likely to need further evidence of an improving trading backdrop before turning more positive," Johnson concluded.