TUI (LSE: TUI) shares have climbed 28% so far in 2023. The travel operator looks to be on the recovery trail after a few bad years. From a 52-week low of 101p in October 2022, we’re looking at a 70% gain.
The travel business was already struggling by the time Covid arrived, mind. And over the past five years, the TUI share price is down a whopping 89%. A significant part of that fall came before 2020.
The shares gained a couple of percent Tuesday morning, after a Q1 update. For the quarter to 31 December 2022, TUI customer numbers reached 93% of 2019 levels.
Revenue rise
Revenue increased by €1.4bn from last year, to €3.8bn. But the company is still not back to profitability, though it reckons it’s getting there. The quarter saw negative underlying EBIT of -€153m. But that’s €121m better than last year.
The update spoke of “expectations to increase underlying EBIT significantly” for the current year, as bookings are improving nicely. Bookings for this summer are apparently now 10% ahead of pre-pandemic volumes.
Back to growth?
Is TUI out of danger now and heading for a profitable long-term future? Yes, I think it could be. Do I believe it’s a good buy right now? No, I don’t. Let me explain why.
On the face of it, valuations look attractive. Forecasts suggest a return to profit this year. They put the stock on a price-to-earnings (P/E) ratio of 10.5. And that could fall below eight on 2024 predictions. Looks cheap.
We could even see a dividend by 2024. Analysts don’t expect a yield of much above 1%. But it could be a significant recovery milestone.
Headline valuation
I suspect a lot of investors will like the headline valuation and will buy. It’s a common strategy to not over-analyse and to make more enjoyable use of one’s time. The number of shareholders following that approach who’ve retired with good sums in their Stocks and Shares ISAs is testament to its potential success.
But I can’t do that. There’s one critical thing on the balance sheet that doesn’t show up in the usual metrics based on share price. I’m talking about debt.
To survive the pandemic, TUI took on huge amounts of it. At 31 December, the balance sheet was groaning under €5.3bn (£4.7bn) of net debt. The company’s market cap is only £3.2bn. Anyone buying shares today is buying more debt than company.
Adjusted valuation
We can adjust the headline P/E by adding in net debt and using that total as a basis. That way, we see an effective debt-adjusted 2023 P/E of around 25. And for 2024 it would still be close to 19. Perhaps not such a screaming buy.
Now, I think TUI can probably service its debt, get back to earnings growth, and even start paying progressive dividends. And if it does all that, I reckon investors buying today could do well.
But for me, all that debt means much greater risk. If it’s not significantly reduced when the next crisis arrives, I think TUI shares could nosedive again.
