It seems that consumers are still willing to splash out on holidays. Today Tui Travel (LSE: TUI), the world’s largest holiday company reported its third consecutive year of strong earnings growth.
For the 12 months to September 30, turnover increased 11.7% to €18.5bn on a constant currency basis and underlying earnings before interest, tax, depreciation and amortisation increased 12% to €1.1bn.
The company was able to report double-digit earnings growth even though the year was a bumpy one for its airlines. Problems at Tui’s owned airline, Tuifly and the collapse of Air Berlin led to EBITDA losses of €39m.
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And management is expecting another healthy period next year. According to today’s update, demand for trips by holidaymakers across Europe to destinations such as Thailand, Cape Verde, and Cyprus, as well as Turkey and North Africa, which tourists had been avoiding due to terrorist attacks, remains “strong.” Tui is expecting EBITDA growth of at least 10% next year.
Rebuilding the business
Its phenomenal growth in recent years is a result of the company’s decision to move away from being a simple tour operator to focus on a model whereby it owns each of the component parts of a holiday, including hotels, cruise ships and planes.
This verticle integration allows the group to offer customers more for less, cutting out the middleman. According to City analysts, pre-tax profit is expected to hit £911m for the financial year ending 30 September 2018, up 121% from the £410m reported for the year ending 30 September 2015.
Despite this growth, shares in the travel group do not look overly expensive. Based on current growth forecasts (City and management), the stock is trading at a forward (year-end Septmeber 2018) P/E of 12.9. With earnings per share set to grow at a double-digit rate, I think this multiple undervalues the business.
In addition to the low valuation, the shares also support a dividend yield of 4%. The payout is covered 1.7 times by earnings per share.
Overall, as an income and growth play, I believe there’s no better buy than Tui.
Making room in the portfolio
To make room for it in your portfolio, I recommend selling South Africa-based financial services company Old Mutual (LSE: OML).
This has been a perennial under-performer. Over the past five years, the group has struggled to grow revenue and earnings per share have gained only 11%. City analysts are expecting the business to report earnings growth of 9% for this year, although the bulk of this will come from the group’s break-up.
To unlock value, management is hiving off the firm’s UK wealth division and will list a South African holding company on the Johannesburg Stock Exchange in early 2018. If correctly executed, City analysts believe that the break-up sum-of-the-parts valuation is around 260p, 30% above current levels.
However, even though Old Mutual could be worth 30% more by the end of next year, after the break-up, I’d rather put my money on Tui due to its steady growth and more predictable outlook. Even Old Mutual’s 3.6% dividend yield, which is covered three times by earnings per share, isn’t enough to convince me otherwise.
