, the British package holiday operator, recently returned
to profitability as the result of a strict cost cutting scheme and a recalibrated focus on margin ahead of turnover in the fiercely
competitive holiday market. However, due to the terror threat in
Europe affecting several popular holiday destinations, the optimism has been fading lately, as consumers postpone holiday bookings.
While the geopolitical concerns are indeed likely to affect revenues
overall, we don’t think a marginal drop will be enough to offset the turnaround of the company’s financials and could even lead to the benefit of consumers switching into package deals (away from individual home-made trips for security reasons) or longer haul trips to safer destinations (which are generally more profitable).
Furthermore, we note the benefit of lower oil prices as well as
depreciating GBP, which provides tailwind for the company.
Credit ratings of its bonds are B and B+ rated with S&P and Fitch
respectively, and was last upgraded in 2013 by both agencies. The 2020 EUR bond is currently trading at a further discount to this rating with a 697 bps Z-spread and 7.0% yield to maturity, which offers a 1%-point yield premium to the Bloomberg BVAL EUR Consumer Discretionary credit curve. The bond may be called in June at 103.875 (unlikely in our view), which would then constitute an annualised yield of 12.8%. A par call in 2018 is the worst yield at 6.3% annualised.
The main risk is another terrorist attack in Europe or at key tourist
destinations in Turkey or Egypt, which would hurt consumer confidence further. European economic performance poses a risk as
well while the risk-off impact of a Brexit on British assets could be
somewhat offset by the competitive advantage of further depreciation of GBP.
Source: Saxo Bank
— Edited by Clare MacCarthy
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