The collapse of Thomas Cook Group has been seen as a real opportunity for rival travel companies, and none more so than the UK’s largest TUI (LSE: TUI).
Bad news, good news
The FTSE 100 group’s share price jumped almost 10% yesterday as investors assumed the collapse of Thomas Cook would ease the industry’s overcapacity issue at a stroke.
TUI is up another 5% today after publishing a positive pre-close trading update, which saw chief executive Friedrich Joussen pledging to support its customers who are booked on Thomas Cook Airlines flights, while saying the group is assessing the short-term impact of the group’s insolvency on its own results.
Joussen buoyed markets by insisting that TUI’s “vertically integrated business model proves to be resilient, even in this challenging market environment,” while its Holiday Experiences business continues to deliver strong results.
Wider warning
Lest we forget, TUI itself issued a profit warning in March, saying earnings could drop by around 26%, due to the grounding of Boeing’s 737 MAX aeroplanes, of which it has 15, with more on order. Joussen also referred to “airline overcapacities and continued Brexit uncertainty,” but said the summer 2019 season is closing out in line with expectations. The earnings drop signalled in March still stands though.
TUI will combat these challenges by becoming more cost competitive and extending market share where possible, while developing the brand as “an integrated digital tourism platform business.”
There’s good news with signs customers are returning to Turkey and North Africa, while currency hedging has helped the group plan capacity and pricing.
Turbulent times
Nobody doubts TUI is in a tough industry. Its stock is down by a third in the last 12 months alone, while traditional airlines, such as British Airways and budget carriers easyJet and Ryanair, are also facing plenty of turbulence.
The good news is you cannot simply read over problems from Thomas Cook and assume they apply here too. First, Thomas Cook sank under a £1.7bn debt mountain, much of which stemmed from its failed merger with MyTravel. Also, management now seems to have spent more time lining its own pockets than turning round an embattled business.
TUI’s net debt stood at €1.96bn on 31 March, up from €576m the year before. However, it’s a much bigger company with a market-cap of £5.4bn against £2.2bn at Thomas Cook’s peak. The recent jump reflects planned ongoing financing of its aircraft order book, with more aircraft being brought into ownership and under finance leases. Debt is now returning to the normal seasonal pattern, as the group completes the reinvestment of disposal proceeds received in recent years.
Despite this week’s share price surge, TUI’s stock still trades at just 11.2 times forward earnings. Revenues are expected to fall 29% this year, but rise 45% next. That’s a bumpy trajectory, and I forecast clouds as the global economy slows. On the other hand, we might just get a Brexit resolution one day, and that will surely help.
TUI’s operating margins are thin at 3.4% while the yield is fat at 5.3%, with cover of 1.5. It’s a cyclical stock, so what happens next partly depends on broader economic growth. Well worth a look though.
