Spare a thought for long-term investors in TUI (LSE:TUI) shares. Over the past year, the TUI share price has fallen 52%. Over five years the decline is even more stark — the shares have collapsed by a whopping 82%.
So, why has the tourism operator struggled in recent years? And does the downtrodden share price make this stock a bargain buy for my portfolio today?
Let’s explore.
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A weak balance sheet
Perhaps the biggest problem facing TUI is the €3.4bn net debt burden the business is grappling with (excluding lease liabilities). In order to survive the pandemic when international travel came to a sudden halt, the company borrowed heavily. The Hanover-based firm received aid from the German government as well as other creditors.
Last week, the holiday group took an important step towards tackling its balance sheet woes. Via a €1.8bn discounted rights issue, TUI hopes to get its ballooning net interest payments under control, reducing them by approximately €80m to €90m.
On the face of it, this is a promising development that could provide a much-needed route to recovery for the business by bringing net debt down to pre-pandemic levels. However, it represents a massive dilution of existing shareholder interests and the initial market reaction was a sharp sell-off in the company’s shares.
If TUI needs to dilute further in the future, confidence in the company’s ability to deliver attractive returns could evaporate. Plus, the dividend remains suspended, so this isn’t a suitable stock for passive income seekers.
Silver linings
That said, there are signs TUI is heading in the right direction. Aided by a recovery in the global tourism market, revenue for Q1 FY23 increased year-on-year from €1.4bn to €3.8bn. This translates into diminishing losses for the company, with underlying EBITDA at -€153m, compared to -€274m in the prior year. The group expects both figures will experience strong improvement over the coming year.
The company is also expanding its offering. It recently launched a range of accommodation-only products in Scandinavia and it’s currently piloting a tours platform in Belgium. In addition, digital capabilities remain a key priority with further app development planned.
Although these are nice features, I’m not sure they really affect the big picture. Fundamentally, hopes of a recovery in the TUI share price will be driven by core benchmarks that investors have a keen eye on, namely debt levels, sales, and profitability.
Should I buy TUI shares?
There are some indications that the green shoots of recovery are beginning to emerge for TUI. The macro backdrop has improved considerably, with public health restrictions no longer a serious impediment to trading activity.
However, net debt remains a huge concern — and it’s enough to put me off investing at present. Granted, there’s certainly a route to a brighter future for the company and I’ll keep TUI shares on my watchlist. But, I’m not convinced the risk/reward profile of the stock is attractive, especially considering there could be further dilution of shareholder interests.
I’ll be looking closely at other shares in the travel sector to take advantage of a recovery, but, at present, TUI’s finances aren’t solid enough for me to buy today.
