This won’t do anything to dispel the notion that tour operators are low-quality businesses that have only been able to survive in the internet age through ambitious merger deals and aggressive cost-cutting.
Tui Travel, the FTSE 100 company created by the merger of First Choice and Tui, has parted company with its finance director Paul Bowtell after being forced to write off £117m of legacy receivables and restate its results for 2009 by 10 per cent.
From a company press release:
On 10 August 2010, as part of its results for the third quarter and nine months ended 30 June 2010 (unaudited), TUI Travel reported that following completion of the integration of IT systems in its UK mainstream business, it had written off a number of legacy receivable balances that had built up over an extended period of time, amounting in total to £29m. This balance was reported as a separately disclosed item.
The ongoing audit for the full year ended September 2010 has highlighted a further £88m of irrecoverable balances that now need to be written off, giving a total of £117m. These have arisen as a result of failures to reconcile balances adequately in legacy systems in the retail and tour operator businesses in TUI UK. As a result, TUI Travel now believes it is appropriate to restate its results for the year ended 30 September 2009.
Predictably that’s all gone down rather badly:
The cause of the problem, according to analysts, lies with Tui’s use of two separate computer systems following the merger with First Choice in 2007.
From Merrill Lynch:
Our understanding is that these balances arise from the failure to reconcile debtor balances in the Tui UK Tour operating business with Creditor balances in the Tui Retail business, essentially leading to an overstatement of group profits. This is a UK issue, and the UK MD and FD have also left the company.
Tui is trying to put a brave face on things by reiterating full year guidance and providing an update on current trading, which the company says remains strong. Analysts disagree and reckon the statistics show a slowdown in the rate of booking volume growth in the past three weeks.
And that is not all the number-crunchers are worried about.
Over to Merrill again:
We believe Mr Bowtell is held in high regard by the market and we see this as a negative for the stock. Furthermore, we have concerns regarding the nature of the system failure with balances not being reconciled, an issue arising from Tui’s legacy systems.
(Note that Bowtell was the FD at First Choice not Tui, but he seems to have done the honourable thing and taken the blame for this unfortunate situation).
And as Citigroup notes that exceptionals are becoming rather commonplace at Tui:
TUI has been encouraged by the return of consumer confidence and the recent improvement in trading. However, aside from the £117m of write-offs announced today, the pre-close highlighted that further restructuring was required at Corsair (c.£60m) and in the UK (c.£20m). High levels of “exceptional” costs have been a recurrent feature for the tour operators, resulting in a questionable quality of earnings and contributing, in our view, to the apparent low rating. Prospects of a TUI AG bid may support the shares.
Related Link:
Tui finance chief steps down after accounts blunder – FT