The company on Thursday reported a loss before tax of £1.5bn for first half ended March 31, compared to a loss of £303mln a year ago, on revenue of £3bn, down from £3.2bn last year.
READ: Thomas Cook becomes potential takeover target as market value plunges after fresh profit warning
It also warned that underlying earnings (EBIT) in the second half would be behind the same period last year due to higher fuel and hotel costs, Brexit uncertainty and competitive pressures.
Citi cut its rating on the stock to ‘sell’ from ‘neutral’ and its target price to 0p from 28p, saying the travel firm’s outlook was much weaker than expected.
Citi reduces earnings forecast
The stockbroker reduced its underlying 2019 earnings (EBIT) forecast to £163mln from £221mln. The estimate excludes the £1.1bn impairment Thomas Cook took in the first-half for the revaluation of the MyTravel business it merged with in 2007.
“Guidance that full-year net debt will increase by a similar amount as the 1H18/1H19 move (£361m) points to 2018 net debt of circa £750mln (Citi £740mln) and implies zero equity value,” Citi said.
Citi also fears that news of the £1.1bn writedown and the firm’s remarks about “material uncertainties” will unsettle consumers and drive further weakness in bookings, which are down 12% for summer holidays this year.
It added that further weakness in bonds and shares may cause Thomas Cook to look to tighten payment terms.
Thomas Cook has secured a £300mln bank facility to provide additional liquidity for the winter 2019/20 season, but it is subject to the sale of its airline business.
'Material uncertainties' around airline business and bank facility
Citi sees material uncertainties around the group’s plans to see its airline business and the bank facility.
“We struggle to see the group receiving a high enough offer to prevent the deal being dilutive to earnings,” the investment bank said.
“We note that new £300mln credit facilities are not yet committed and ‘dependent on progress in executing the strategic review of the airline’.
“Although management commented that this does not mean they have to sell the airline to access the facility, the lenders appear to have room to walk away.”
Citi sees debt for equity swap or substantial rights issue
Citi said debt markets are “clearly highlighting” the risk of financial distress. It sees a debt for equity swap or substantial rights issue as probable outcomes.
The investment bank said a highly priced airline disposal could alleviate near-term pressures and free the way for an offer for the remainder of the business from a non-EU entity such as Chinese group Fosun, which has a 17% stake in Thomas Cook.