2023-11-13 15:47:58 ET
Summary
- TUI has experienced a longer downturn than expected, but I do not recommend selling at this point, given the upside that see for the company eventually.
- I believe there are better investment options available than TUI, but TUI affords investors the opportunity for a massive RoR, albeit at a significant risk profile.
- The underlying earnings and quarterly developments are moving in the right direction, and I see a potential for positive development over the next few years.
Dear readers/followers,
TUI ( OTCPK:TUIFF ) has been a wild ride for me. While this position in my portfolio is small enough to where any downward momentum wouldn't be that serious, or where a total loss of capital would not be severely impairing, I obviously still want this to turn out well. I'm not going to say that it's "small enough that I don't care" - because even if a position is just $10, I still care about it. I care about money - as should you.
TUI is a company I have actually been covering for several years. When I first wrote about it back in 2019 , I was positive about the stock - and the company has declined significantly since then. Of course, this also came in conjunction with COVID-19, which saw significant valuation shifts in the entire cruise, resort, hotel, and leisure industry - which TUI has not been immune to in the least. However, I went in at a "BUY" with a PT of €10/share, and as you can see, that's actually below the PT I have today, which is €14/share. Over this time, I've seen multiple fundamental shifts in the company and its business - and in the entire leisure industry. A lesson for me as an investor when it comes to TUI has been that leisure/destination/cruise investments should be kept at an absolute minimum, but in the right circumstances, they can offer massive upside. I made a clear point when revisiting the company over a year ago, where this is a very long-term investment.
"I believe with a high degree of conviction that investors in TUI today, will be very content with their return potential in 10 years. Even if more headwinds come the company's way, I believe that the sheer undervaluation that the market applies to this company's cash flow and revenues makes this an attractive play provided your risk tolerance is up to the task."
(Source: TUI Article )
I still believe this to be the case.
The downturn in TUI has been far longer than I expected, and I thought it a good time to update this company to see if there might be reasons to "SELL" here.
In short, the answer to that is "NO".
However, given where the market is today, I'm not adding more either - and if you're considering investing, while the company warrants a "BUY" here, I would quickly point out to you that there are substantially better qualitative investments out there that you could go for.
So, let's see what TUI has going for it going into 2024 - because the current share price implies that things are bad.
This is an updated article - and you can find my most recent piece from August here.
An Update on TUI - this is a long-term investment.
Despite a material decline in the company's valuation since my last article, there are plenty of positive indications and news for TUI on a forward basis. While this is the "specciest", or most speculative of speculative investments that I have made bar none, it's a company where I believe that an eventual upside is inevitable.
How long - that's something we'll have to see. However, the clear stance that I have at this time, which I'll also go into at the end of this article, is that the market is turning negative on the company, even more, negative than before, just as the EPS is turning positive again, which it did during 2023E. I also believe it is likely that we'll see positive trends for 2024E and forward, and I'll go into why I believe this is.
Generally speaking, when it comes to investing in cruise lines and resort companies, my interest is extremely mellow to nonexistent. I don't like the risk profile, I don't like the ups and downs, I don't like the business model. I like enjoying a vacation from them, but I don't necessarily want to invest. Typically.
Unless of course, as we have now, that the company is getting really, really cheap. That's what we have for TUI here. And the company does have some relevant and interesting recent news. This includes a very recent sale of aircraft and leasebacks. This specific agreement was for a total of six new 737 MAX-8 for around $147M each, financing new planes with delivery dates in 2024. This is done through a combination of deals with SMBC Aviation Capital Limited and IC Airlease One, with three planes each. ( Source )
We don't have full 4Q results yet, but every indication here is that the company's full-year results are going to be positive in nature, at least partially.
Why do I say this?
Trends.
The company officially expects to deliver on its FY23 expectations, with strong customer demand, a 3Q23 revenue of €5.3B (annualizing over €20B worth of revenue) at an EBIT of €169M, which is a very strong improvement given that the previous year was at negative EBIT and close to below €4B in revenues.
Summer bookings remain strong - up 6% versus last year, with higher price levels being pushed to consumers, and 14% of the season still to go. The statement that the company is about to deliver a significant 2023 YoY increase should be responded to with a resounding "well, of course", but, it seems that the market has yet to fully take the positive trends and recovery into full consideration here.
This is a strong performance across all segments, by the way. Hotels and Resorts were good even last year, but take a look at what has happened to cruises.
TUI IR (TUI IR)
And, for that matter, in M&A.
TUI IR (TUI IR)
The current valuation is one I expected when the company was performing abysmally during COVID-19 - not as the company is showing sound improvements across the entire line.
As one of the largest operators in its market, TUI is in a good position to not only grow its market share but become the go-to choice for most people seeking a planned vacation or destination activity, such as "amusement". That is worth money - and I'll argue that with anyone who has a different stance here.
Growth opportunities for TUI are not few. We're talking about Hotel growth potential through TUI's hotel platform, and its international business development, we're talking about asset-light and JV growth following COVID, where many operators are struggling. An example of this is the JV TUI did with the RIU family, with a 49% TUI ownership that allowed the use of RIU's debt capacity resulting in minimal debt impact for TUI .
While it is of course much too early to say that "yeah, TUI has recovered", because this is certainly not the case yet, the company's recovery trajectory is very much "on point". We're talking hundreds of millions in top-line recovery, more than €1B in net debt reduction , extending a revolver by 3 years, showcasing market confidence and official rating upgrades ( albeit to B2/B).
The company's strategy of capitalizing on its size and position through JVs like RIU means a more asset-light growth ambition that I believe will result in TUI recovering even more powerfully when "it's time".
You only need to look at the bridge to see the fundamental and indeed very solid improvements on a YoY basis.
TUI IR (TUI IR)
The company reports solid EBITDA and very much improved WC thanks to strong prepayment inflows. Climate-related effects such as the Rhodes wildfire continue to affect a company like this - but as of this time, I would consider any climate impact like this to be part of the standard M.O. for a leading destination/vacation business such as TUI.
Also, the company as of the Pre-4Q close trading update, which is part of the reason for this stance update, confirms the likelihood of a very strong summer.
TUI IR (TUI IR)
The current official forecasts for the 2023 fiscal include a €16.5B revenue and an underlying EBIT of over €400M. The company's work to strengthen its balance sheet, improve profit and margin, accelerate growth, and cash flow focus continues. I do not expect a quick recovery of the dividend. 2025-2026E at the earliest - but TUI is not a dividend investment, just as Rolls-Royce ( OTCPK:RYCEF ) was a dividend investment. But when you can "book" a RoR of 200-300%, dividends need not be your primary concern.
The company's forward ambition is clear. Remember, TUI was not IG-rated. Its ambition is not an IG rating. It seeks to recover to BB, a gross leverage of below 3x, and an EBIT to significantly build on €1.2B.
If the company manages to achieve that, then I expect a recovery of the dividend here. Overall, in the context of 1Q23 and 2Q23 results for TUI, the 3Q23 results were very good. Good 1Q23 and 2Q23 (though 2Q23 weren't back to pre-pandemic) results might have been flukes, just basic recoveries - but through-cyclic and summer trends make the improvement one I would say will "hold" going into the next fiscal. The broader trends I'm seeing for TUI here include a recovery not just for summer or one specific holiday season, but is a significant recovery across every single KPI. This broad-based improvement over the course of the year would be one thing, and positive enough, but we can then combine this with the fact that we're already exceeding 2019 summer levels despite 6% higher booking prices , the underlying trends in the earnings here are very much solid.
There exist pockets of company weakness and things the company needs to work through, but the simple fact is that as of 3Q, every single segment, including Holiday experiences and M&A are showing positive EBIT for the first time in several years. Certain geographies in M&A are still down slightly, but nowhere near as much as they were only a year back. This latest quarter is a confirmation that this recovery is continuing, with confirmed M&A load factors of 93%, a YoY improvement of 2%.
The broader trends here confirm that the company is on a trajectory of recovery. A quick look at just how the regions have developed in terms of M&A for the various regions gives a bit of confirmation here.
Here is 1Q23, for M&A regions.
TUI IR (TUI IR)
And here is 3Q.
Comps notwithstanding, I expect the current trajectory to continue, and this is why I continue to have a positive outlook for TUI here.
Analysts are saying much the same thing, and forecasts for the company are as follows if we look at valuation and what you can expect from TUI.
TUI - The valuation is at the bottom, giving significant upside potential
In many of my investments similar to TUI, meaning high-risk high-reward turnarounds (another example is Medical Properties ( MPW )), some of you may employ tax-loss harvesting strategies.
This is not something I'm able to do, because the way I invest, I do not have a capital gains tax - but also can't loss-harvest. Because of this, I'm "locked in" with my positions until they either go up or until I "fold". In my career as an investor, I have folded only 2 times. All of my other investments have either gone back or have been bought out of the market. I believe it goes to showing patience .
When it comes to TUI, I do not believe this is a company where I will fold or one that will go bankrupt. Far from it. I believe that current trends holding, TUI will be on the way up.
Am I the only analyst thinking this way?
Hardly.
TUI has really crashed to the bottom - and I obviously bought my shares at nowhere near any sort of high price - but I'm still in the negative. That being said, let's look at estimates for the future.
Me, I forecast a very clear reversal in earnings. I expect the company to go GAAP-positive at least €0.6/share this year for the TUI1 ticker , and for the company to breach the €1/share profit level on a GAAP basis in either 2024 or 2025E.
TUI EPS forecasts (TIKR.com/S&P Global)
I am not alone in expecting this. This doesn't make it "right" - but I invite you to find fundamental reasons why TUI's turnaround will fail - and I will be happy to address these in the comments.
Every single relevant KPI both by TUI and by analysts following and estimating TUI is expected to revert in 2023-2027. That's what I am counting on as well. It's based on this, that I continue to hold TUI at a "BUY", and why I am neither changing stance nor PT here.
Analyst targets?
8 analysts follow the company here, with 6 analysts at a "BUY". The price targets here go from €6 to €16/share, with an average of €10. Every target here is higher than the current €5/share for the TUI1 ticker. My PT is still at €14/share. This price target is based on, aside from simple median sales multiples (A median P/S implies almost €20/share), what the company managed when things still worked fine , which I believe they will again. At a profit of between €1-€2/share, which is not unrealistic based on 2024-2025E numbers, the current share price for the TUI1 ticker implies a P/E of less than 5x. I would forecast it, non-impaired by current results, at 13-15x P/E for the longer term, which at a €14/share PT and P/E implies managing an EPS of €0.93. The company is close to managing €0.7 this year. This forward expectation and what we're already seeing in terms of earnings is, I believe, a good indication of what we can expect in the future and why I chose this price target and do not believe it warrants a change.
TUI is a risky prospect - but it's not as risky as you might think. The recovery seems to me to be clear - and the current KPIs are confirming this, with 1% net margin, 2% operating margin, and 2.75% FCF margin - that's a recovery from negative numbers.
My main reason for viewing this company in a much more positive light than previous articles is that the company has begun to seriously, and fundamentally move the needle when it comes to improving for the next few years. To say that the company still has ways to go would be an understatement, but we've seen that the company can once again generate positive results, and I believe this to be only the beginning of an upward trend. I believe the forecast be accurate based on the continued downpayment of company debt, which will clear away interest costs, the company's sheer market position across its main markets, and improvement in its capital structure with new approaches for JV's and how powerful the reversal in top-line results are. It bears understanding just how bad this downturn was for the company, to understand why I expect what I expect.
Once the company gets its ducks in a row in terms of restoring the margins, - which by the way has already begun, and is continuing going into 2023-2024E - I believe earnings will recover to the same level, at which point arguments against a higher multiple will be extremely few.
The only reason not to invest in TUI here - and this is a big one for sure, is if you can find better places to put your money. And there are many safer places to put this. TUI's appeal, for the time being, is very much niche compared to many other qualitative businesses out there.
In terms of risks, this investment should be sized accordingly if you decide to go and invest your money here. The sheer volatility and downturn we've seen, alongside the likely long period of time until recovery, means that this is one of the riskiest investments I hold. Typically, risk for me is implied by the amount of time I have to wait until I get my money back or make a profit - and this one has turned out to be significant in that respect. I would never invest more than 2% of my entire portfolio in these sorts of stocks, and TUI is less than 0.3% for me. Coupled with closely following results and keeping an eye on fundamental deterioration is how I manage this risk.
Here is my thesis for TUI as of November 2023.
Thesis
- TUI AG is one of the most appealing travel companies in all of Europe. Unlike many of its peers, it has survived - although the fact that it has survived is one of the best things that can currently be said for TUI.
- I believe the combination of current bottom-level valuation combined with a relatively well-established trend of normalization only has one logical eventual outcome - an upside.
- However, the risk inherent to such an investment makes it incompatible with my current conservative portfolio.
- Still, as a speculative position, I cannot rate TUI anything but a "BUY" here. The company's cash flows are "too good" long-term, and the company's turnaround seems to be working.
- My PT is €14 - but keep in mind that this is a speculative and high-risk play - nothing else. I now have a position in the company, and accept the risk - albeit a small position.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on future valuation and forecasts.
This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks
For further details see:
TUI - I Continue To Accept The Risk In This Investment, And Say "BUY"