In Thursday trading, the biggest gainer in the FTSE All-Share is TUI (LSE:TUI). TUI shares are up almost 8% so far, touching 600p. Despite this large move in the short term, I feel there are several reasons that investors need to be aware of as to why this might not be a good time to buy. With the stock down 59% in the past year, the jump today doesn’t tell the whole story.
The need to raise capital
It was recently announced that the company would be raising new cash via a rights issue. In short, a rights issue is where the business offers new shares to investors, usually at a discounted price. The investor can buy the shares more cheaply, which is great, but the share price will naturally fall to a certain extent (known as the ex-rights price) due to more shares being in circulation.
The market cap of the stock doesn’t change, as the higher number of shares is offset by the money raised by the rights issue.
For TUI, my issue here isn’t the ex-rights price, but why it needs the issue in the first place. The figure I saw was for it to raise £1.6bn. This is to be used to pay off existing debts, including some pandemic loans.
My problem here is that if the company was performing well (or thought it could have a strong 2023), it would aim to use cash flow and retained profits to pay down debt. The fact that it needs to go to shareholders and ask for their money isn’t a good sign.
Lagging behind peers
Another reason why TUI isn’t on my list of travel and airline stocks to buy is due to underperformance relative to others in the industry.
I know the sector endured a horrible stretch over the pandemic. Yet some companies are showing really positive signs. For example, easyJet came out with a Q1 2023 update saying that it expects to make a full-year profit this time.
Granted, TUI has a much larger holiday and ancillary services business than easyJet does, besides pure flight revenue. But it does highlight to me that the sector is getting back to pre-pandemic levels. TUI is lagging in this regard when it comes to financials, and it can’t blame it on the pandemic nowadays.
Having a balanced view
The main alternative to my view is a stronger-than-expected summer booking period. The stock jumped today following an Easter trading update. It mentioned that “booking momentum remains encouraging”. If this continues into the summer, investors could see this as a long-term value buy from current levels.
Yes, the long-term trend (down 87% in five years) has pushed the stock to a cheap price. I don’t dismiss this thought, but I do think that there are much better places in the sector to invest instead. Therefore, I feel investors should be looking elsewhere (such as easyJet) and not at TUI to buy right now.
