Description

The recent weakness of the TUI (TUI1-ETR) share is, in our view, an attractive opportunity. TUI is Europe’s leading tour operator; however, it generates the vast majority of its earnings in its hotel and cruise business.

There are two angles to consider. In the short term, we think the stock sold off due to two recent placements in July (an overhang from UK investors who had to sell due to the LSE delisiting, and hedging for the issue of a convertible bond, overall ca 6% of shares outstanding) and concerns regarding the CQ2 (FQ3) earnings following Ryanair’s profit warning.

We are not concerned about the results of H2, as the available flight capacity should have helped TUI in its short-term business, particularly its growing dynamic packaging business (as TUI has access to the hotel capacity, which is the bottleneck). TUI already highlighted this issue in its last call. Additionally, in mid-June, FTI, Europe’s third-largest tour operator (EUR 4.1bn sales), filed for bankruptcy, which means that as of July 6, all tours were canceled. TUI is approaching these customers and offering tours without down payment (there is a mandatory insurance to protect customers in case of the insolvency of a tour operator, so these customers will get their payments to FTI refunded).

https://www.tuigroup.com/de-de/medien/presseinformationen/deutschland-meldungen/2024/Juni/2024-06-03-tuid-unterstuetzt-fti-gaeste-mit-attraktiven-konditionen

https://www.fti-group.com/en/press/fti-group-press-releases-and-information/detail/news/preliminary-insolvency-proceedings-fti-touristik-gmbh-all-fti-trips-from-06-july-2024-are-cancelled?tx_news_pi1%5BoverwriteDemand%5D%5Bcategories%5D=57%2C58&cHash=dc9b7fd6033832c54c38b49eece1ff97^

As of May, the most important KPIs for the business look strong. For example, hotel average daily rate growth of 9% for H2 is at the FQ2 level, while occupancy is even higher at +1% versus -2% in Q2. Although realized cruise occupancy will not rise in H2 (as the ships were fully booked last year as well), more capacity at a slightly higher price implies continued growth for H2. Overall, we consider 8% EBIT growth for H2 to be not aggressive, which implies EUR 1300m EBIT (+33%), a slight beat of the EUR 1277m consensus for adj. EBIT and 6% upside to management’s minimum target of 25% growth (bear in mind they continue to underscore this, at least in their presentations).

In absolute terms, the H2 EBIT improvement is approximately 50% of the H1 increase of EUR 213m.

In the short run, we expect positive earnings revisions and a soothing of concerns regarding the earnings outlook to be the drivers. In the mid-term, the market should rerate TUI, which is currently perceived as a cyclical, value-destroying tour operator, to a hotel and cruise operator with integrated distribution. This integrated distribution should lead to above-average occupancy of TUI’s own hotels, as we have already seen in the past (in 2023, 82%, i.e., clearly above the global average or the 66% of Accor S.A.).

In a sum-of-the-parts analysis, there is strong upside. We use an EV/EBIT multiple of 12 for the hotels, which is still a decent discount to the large international chains that trade at 15 to 19 times EBIT, and a multiple of 16 for the cruise business, the same as Royal Caribbean, which is also the partner in the 50/50 joint venture TUI Cruises (TUI Cruises figures shown on a 50% basis). We use a ridiculously low multiple of 1 for the tour operator business and still derive an equity value of EUR 20.9 per share.

Not only on a sum-of-the-parts basis and relative to its peers, but also compared to its own history, the share is cheap. For example, the EV is now lower than during COVID, and the earnings multiple was only briefly lower during the recession scare last fall.

Furthermore, the cyclical outlook is better than perceived, as, for example, real wages have inflected positively in TUI's two most important source markets.

The mid-term growth ambition of 7% to 10% EBIT CAGR should be driven by market growth of around 5% and additional capacity in both hotels and cruises.

Catalyst

earnings