Summary

  • TUI a global tourism provider. It caters for the entire travel chain with own hotels, cruise ships, travel agencies, aircrafts, tour operators and online platforms.
  • Hit by the pandemic travel was suspended since March 2020 and resumed partially in the later months. The lockdowns disrupted the company’s business. TUI suspended dividend for the financial year 2019.
  • Revenue is down 58% and bottom line hit by loss of EUR 3.14 B. However when some travel restrictions were lifted, there was a strong return of bookings giving a hope of a fast revenue recovery in the future.
  • TUI had to apply for state support to cover the liquidity gap. It agreed EUR 3 B package with the German Government. The company’s debt almost tripled over the year.
  • The stock price is fair based on P/E evaluation method. There is no much upside potential to reward investors for risk.
Dividend    Revenue    Profitability    Financial Strength    Investment Case

German TUI (Touristik Union International) Group (TUI1) is a global integrated tourism company with 277 subsidiaries. It covers the entire tourism value chain. The company’s portfolio consists of tour operators, 1600 travel agencies and online portals, 5 airlines with 150 aircrafts, over 433 hotels and 17 cruise liners. 27 M customers are provided with holiday experience in 180 regions around the globe. Hotel brands are Riu, Robinson, Blue Diamond and others. Tour operators include TUI Deutschland, airtours, Wolters Reisen and First Choice. TUI has the following segments:

  • Holiday Experiences
    • Hotels & Resorts. Majority of hotels are in four- and five – star categories. The largest hotel company in the portfolio in Riu.
    • Cruises – consists of the joint venture TUI Cruises and Marabella Cruises with combined fleet of 17 vessels.
    • TUI Musement – as a result of Musement acquisition TUI has built a two sided – holidaymaker and provider – open platform with around 170K products.
  • Markets & Airlines. Consists of travel agencies and has the following regions:
    • Northern Region – comprises tour operators and airlines in the UK, Ireland and the Nordics.
    • Central Region – comprises tour operators and airlines in Germany.
    • Western Region – tour operators and airlines in Belgium and the Netherlands.
  • All other segments.

The pandemic hit hard the tourism sector and TUI. According to CEO Covid – 19 brought tourism to standstill. March shutdown left the company with zero sales overnight. Operations had to be suspended and costs cut as quickly as possible. Cash costs were cut by 70% within weeks.

In connection with Covid – 19 TUI agreed on stabilization package with the German Government. At the same time the company reduces a capital intensity of business. It is increasing the proportion of assets operated through management contracts or franchises. In July 2020 the company sold Hapag – Lloyd Cruises to TUI Cruises, joint venture with Royal Caribbean. It will have half a stake in the company. Also TUI is speeding up digital transformation. It launched the activities and excursions platform TUI Musement and platform for hotels.

TUI’s financial year ends on September 30, 2020. As it starts in 2019, we attribute the results of the year ended September 30 2020 to the year 2019.

  Dividend

Dividend Dividend Yield 5Y Growth PayOut Ratio Ex-Dividend Date
0 0% In 2013 – 2018 10% p.a. 0%

In pre – crisis years TUI’s dividend has been paid in line with underlying EBITDA growth. Dividend was suspended for financial year 2019. The agreement with the German Government on stabilization package includes a dividend suspension condition. In the previous year dividend was EUR 0.54. Average dividend over 5 pre – crisis years was EUR 0.62 and average payout ratio 63%. The timing of restart of dividend payments is highly uncertain at present.

   Revenue

Revenue 5Y Growth Revenue growth over 2019 Company Outlook 2020
EUR 7.94 B in 2019

EUR 18.93 B in 2018

 

-17% p. a.

 

 

 

Total sales                       -58%

By divisions:

Holiday Experiences      -52%

Markets & Airlines         -58%

All other segments        -78%

Revenue is expected to grow. No specific guidance provided due to Covid – 19 related uncertainties.

 

 

Travel was suspended since March 2020 and operations reduced during peak summer season. In summer, when some travel restrictions were lifted, there was a strong return of bookings. However due to the emergence of the second Covid – 19 wave destinations were limited once again. TUI Cruises and Hapag – Lloyd Cruises resumed partial operations from Germany in July. In September about 40% of hotels were operating. Winter 20/21 bookings were down 82%. According to the company there is strong underlying demand on reopening of destinations as people want to travel.

Due to the continuing Covid – 19 related restrictions TUI is not out of woods. In 9 months of financial year 2020 revenue is EUR 1.37 B versus EUR 6.7 B in 9 months 2019. At the same time with easing travel restrictions TUI restarts operations at fast pace. There was pipeline of 4.2 M booking for summer 2021. By September 2021 there are 283 hotels and 8 cruise vessels in operation; over 245K excursions sold. The trend should continue in the remaining months of 2021. Revenue is improving on quarterly basis: in Q3 it is EUR 0.65 B while in Q2 it was EUR 0.25 B mainly due to the increased number of Markets & Airlines passengers departing. The company expects a recovery of travel this year and a return to pre – crisis level in 2022 which should lead to a strong recovery in revenue.

   Profitability

Profit 5Y Growth Net Profit Margin ROE Company Outlook
EPS -5.34 EUR in 2019 and EUR 0.71 in 2018.

Net Profit EUR -3.14 B

In 2014 – 2018

22% p.a.

 

-40% in 2019

 

 

-271% in 2020

 

 

EBIT expected to recover.

 

The Group financial loss amounted to EUR 3.14 B in financial year 2019 while in financial year 2018 the company had the profit of EUR 0.53 B. The number of employees decreased from 71.5K in financial year 2018 to 48.3K in financial year 2019. TUI sets a medium-term savings target of EUR 0.3 B (with large proportion allocated to Markets& Airlines). It trims investments in hotels and cruises and reduces overhead cost base permanently by 30% with 8K jobs affected. TUI capex was down 38% to EUR 0.5 B. The Group bottom line still suffers losses in financial year 2020. For 9 months 2020 the loss is EUR 2.4 B versus EUR 2.34 B a year ago.

TUI expects the return to pre – crisis level in 2022 with a strong recovery in revenue. The average over 5 pre – crisis years EPS was EUR 1.1. Due to the high indebtedness of the company and potential dilution of the number of shares (due to state bailout) EPS level would be much lower in the future.

   Financial Strength

Company Capital Structure

In EUR B

Year 2018 2019 1HY 2020
Equity 4.166 0.218 -0.525
Cash 1.748 1.233 1.524
Debt, including lease liabilities 2.682 7.669 7.887
Net Debt 0.91 6.42 6.35
Debt/Equity 64% 3518%

Liquidity needs for financial year 2019 were higher than cash inflows from operations. To close the gap the company had to rely on state support. EUR 3 B package was agreed (in two steps) with the German Government. By September 2020 credit facilities consist of 3B state stabilization packages and EUR 1.75 credit line from 20 private banks. TUI’s debt increased almost three times over the year and interest payment is EUR 0.322 B. The state support measures comprise two silent participations convertible in TUI shares of EUR 0.42 B and EUR 0.67 B. The conversion price is EUR 1 per share. As a result the number of shares of TUI may potentially almost triple, if the Government coverts its silent participation. The number of shares at the end of financial year 2019 (that is 2020 September) is 0.59 B. In 9 months of financial year 2020 debt is higher, at EUR 7.89 B. However, cash and bank deposits increased from EUR 1.25 B to EUR 1.54 B.

TUI has S&P rating of CCC+ (with negative outlook) which is lower than investment grade rating. It considers a return to B range rating to be essential to regain access to the debt capital markets.

   Investment Case

The estimate of future stock price and investment returns based on P/E ratio

Assumptions of dividend and EPS growth over the next 5 years
Due to the high debt burden we assume no dividend is paid in the next 5 years.

The average over 5 pre – crisis years EPS was EUR 1.1. We assume that EPS would be equal to a third of the pre – crisis average as the number of shares triple. So we assume EPS of EUR 0.37 (EUR 1.1/3) in 5 years.

Projected stock price
Average P/E over the last pre – crisis 5 years (11) multiplied by EPS in 5 years = 11x EUR 0.37 = EUR 4.07
Future Returns Based on the Assumptions
Stock price upside potential                                     12.4%    from the current price EUR 3.62

Overall return on investment*                                  12.4%

Compound Annual Return on Investment              2.4%

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

The potential reward is low relative to the level of risk of investing in the company stock.

Tourism will grow in the future as it is supported by demographic growth. TUI has strong global brand and aims to return to healthy balance sheet by reducing debt to an acceptable level. It reduces costs, sells assets and drives digitalization. However Covid – 19 related restrictions still keep the company under pressure. Its financial health should improve gradually but the risks are very high and not for every investor.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any positions within the next 72 hours.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.

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