2023-11-15 07:22:12 ET
Summary
- TUI AG has repaid government loans and reduced the stake of its largest shareholder, Alexei Mordashov, to 10.9 percent.
- The tourism industry is experiencing a strong post-pandemic comeback, with TUI showing signs of recovery. An imminent return to profitability is likely.
- An imminent return to profitability is likely.
- However, there are various risk factors to consider, including exogenous shocks, oil price shocks, competition, inflation, and TUI's indebtedness.
TUI AG (TUIFF) has had a rough few years. That should not be too much of a surprise considering that the company offers touristic activities including cruises, hotel and resort stays, and air travel. The Covid pandemic (or, more precisely, the impact of massively overblown countermeasures being imposed by governments around the world) derailed this business model almost entirely, so the German government had to step in to save TUI.
Now, following several capital raises, the last of which was in April , and a subsequent reverse split , the company has repaid all government loans. These measures also helped reduce the stake of its sanctioned shareholder, Russian billionaire Alexei Mordashov, to 10.9 percent. This means that Mr. Mordashov's presence should not be a big problem going forward. There is, in my opinion, only a minimal risk of legal action by Mordashov over not being granted subscription rights.
Despite strong revenue growth - which admittedly was to be expected on basis effects alone given the massive Covid slump - and what appears to be an imminent return to profitability, the stock currently trades at relatively low levels. In this article, I will try to assess whether that makes TUI an attractive investment.
Strong Tourism Drives Results
The tourism industry is in the middle of an impressive post-pandemic comeback. Consumers are prioritizing travel, despite economic challenges. I expect that to include a certain element of what has been dubbed " revenge spending ". That gives the tourism sector overall at least some pricing power, thus softening the inflationary impact on the bottom line.
TUI appears in increasingly better shape. Order volume continues to recover strongly. The growing amounts of touristic prepayments received are a good indicator for this - see the figure "touristic payments on account" (note: these payments have to be booked as liabilities, but a higher number is still a positive sign as it signifies preorder volume). The amount of such advance payments more than doubled to almost €1.5 billion within the nine-months period ended June 30th. Distribution via its own app is increasingly allowing the company to cut out middlemen in the form of independent travel agencies. Retention rates upwards of 40 percent are rather decent, too. TUI may also face a little less competition now than before the pandemic due to the absence of Thomas Cook Group plc, which went into liquidation back in late 2019 when Covid still was some Wuhan bat's problem.
All that shows in the company's results. In the first nine months, the company generated a net loss of €505.5 million, half what it lost during the comparable period of FY2022. However, it returned to profitability during Q3 (profit of €52.5 million, plus €383.5 million YoY). Also, it is noteworthy that fiscal Q4 tends to be by far the most profitable quarter, as this is the main summer holiday season. Based on last year's fourth quarter (attributable profit: € 799 million) the company should have a profitable Fy2022, likely in the range of €300 to €400 million. For 2024, I see the potential of revenues fully catching up to 2019 levels at around €19 billion, while margins should continue to improve.
Risk Factors
There are, however, various risk factors to take into account. Tourism is a business that is inherently vulnerable to exogenous shocks. It does not have to be a pandemic. Extreme weather events, as seen this year in Greece (wildfires) or Italy (flood catastrophes), are increasingly problematic in that regard. One may add here that Greece is one of TUI's most important destinations.
Since the group comprises an airline business and a cruise ship division, it is vulnerable to oil price shocks. If, for example, Israel would be dragged into a war at its northern border, that might hit these parts of the business disproportionately. Right now, I believe the risk of larger-scale hostilities to be moderate. There are also smaller negative factors to consider. For example, Deutsche Lufthansa AG's (DLAKF) tourism-focused budget airline Eurowings is returning to TUI fly's home base of Hanover Airport and already announced plans to station another aircraft there from summer of 2024. And, of course, persistent inflation remains a problem as it may prompt consumers to reassess the size of their travel budgets. Emission targets and financial measures (read: taxes, carbon prices) governments may take to meet them, might also take their toll in the medium to long term.
One should keep in mind that TUI's business is inherently one with low-profit margins. Pre-pandemic, its net profit margin amounted to a mere 2.8 percent ( 2019 ) to 3.9 percent ( 2018 ). This obviously means that even relatively minor disruptions can lead to a pronounced impact on profitability. There is also the issue of indebtedness. Net debt levels, albeit improved significantly, shrinking by about a third to €2.2 billion YoY, due to the April capital raise are still considerably higher than pre-pandemic. Therefore, despite the probability of a return to profitability, a dividend is not to be expected in the immediate future, in my opinion.
Valuation And Conclusion
So, all in all, there are strong results that have to be weighed against significant risk factors when valuing the stock. Currently, there are little over 507 million shares outstanding. I do not expect any buybacks in the near future due to the company's significant indebtedness. But at least the need for additional capital injections should by now be met, barring unexpected events. So, revenue roughly on par with pre-pandemic levels of €19 billion and profit margins at the lower end of or slightly below the pre-pandemic range would add up to earnings per share in the vicinity of €1 per share. While a figure of, say, €0.98 or €1.01 is more likely than exactly €1, I will still work with this number, as it makes calculations blissfully simple.
Currently, the stock would trade at a forward PE multiple of whatever its current price in Euro is, based on the above assumptions. Presently (November 14th) at a multiple of 5.37.
The next step, obviously, is to determine, what multiple would be fair. A PE multiple of 12 to 15 would be conservative based on pre-pandemic valuations. But in a post-pandemic world and under the impression of increased geo-political instability, I believe expectations should be adjusted downward on account of vulnerabilities having become all too visible. Also, the debt load remains much higher than it was prior to 2020 (and at higher interest rates, one might add), despite developing in the right direction. A PE multiple of 7.5 to 10 might be a more suitable target range. I like to be conservative in that regard, so I reckon that other investors may be targeting a little more generous multiples.
In terms of a price target, that translates to a fair value, in my opinion, of €7.5 to €10. Given the relatively high-risk profile, I do not believe EPS of around €1 to be guaranteed. But even if 2024 profitability would clock in closer to what is likely to be FY2023 of €300 to €400 million (= €0.59 to €0.78 per share), the stock would at least not be overvalued by too much from my point of view, even at the lower range of what I see as a fair earnings multiple. On the contrary, anything less than a mid-level catastrophe appears to leave ample upside potential. However, the volatile geopolitical (and to some degree economical) environment makes such a catastrophe more likely than usual from my point of view. I thus believe that short-term volatility in a name such as TUI may be higher than usual in the coming weeks and months whenever there is news of events that may impact the sector.
For those with a relatively high appetite for risk, the stock might already be an interesting opportunity. Personally, however, I intend to remain on the sidelines for the moment. Consequently, I rate TUI as a hold for now, but the stock is definitely not far off buy territory.
For further details see:
TUI AG: Return To Profitability Seems Imminent But Is It A Good Investment?