The inTUItion behind the future of travel stocks

The global tourism industry has been one of the most affected industries by the COVID-19 pandemic as hopeful travellers have been prevented from travelling overseas for the majority of the past 6 months. TUI Group has not been immune to the effects of the pandemic despite having catered to holidaymakers for nearly a century and being the largest leisure, travel and tourism company in the world. The company’s recent Q3 results highlight the impact of COVID-19 with revenues reported at 75 million EUR, which is just 2% of the revenue generated in Q3 2019. In addition, the TUI share price has lost almost 70% of its value over the past year, ranging from 900p in February 2020 to under 300p per share in August 2020.

 

The tourism sector has been resorting to cash reserves due to the necessary upkeep of hotels and other assets, while continuing to pay staff wages. TUI recorded its 2020 Q3 monthly cash expenses at around 550 million EUR and the company was strongly placed at the outbreak of the pandemic with over 2.3 billion EUR in cash. Nevertheless, TUI has had to source further liquidity from the German government with an initial 1.8 billion EUR loan and then a subsequent 1.2 billion EUR loan. The company also sold its stake in Hapag-Lloyd cruises to liquidate its 690 million EUR holdings. The scale of the company and the significant amount of assets on its balance sheet means that TUI Group have a strong chance of surviving the pandemic.

 

Furthermore, TUI Group has approached the crisis as an opportunity. Indeed, Thomas Cook’s demise due to failed merger decisions and a lack of digital engagement must be remembered in the context of viewing the future prospects of travel stocks. In this light, TUI have announced the closing of around 30% of its travel agencies on the high street, along with the potential of up to 8000 redundancies. CEO, Friedrich Jousen, has stated that he is  committed to the company’s ‘digital future’ in consolidating the firm’s market dominance. Embracing the shift, hastened by the rise of online platforms such as Airbnb, is key for the company to return to pre-COVID-19 profitability and maintain market share over the long-term.

 

TUI Group management has also committed to significant restructuring. TUI’s cost reduction target is 300 million EUR per annum, with permanent overheads targeted to fall by 30%. Alongside this TUI Group is aiming to reduce its capital intensity, rightsizing its order book which will be driven by plans for digitalisation. If TUI can survive this pandemic and emerge with improved net profit margins, from lower overheads and operating costs, and a more modern business model, that fulfils customer demands, there is significant potential for upwards share price movement.

 

However, there are many risks that must be overcome before before TUI’s share price can return to levels seen before COVID-19. Surviving the crisis should not be an issue, given the support from the German government. However, for the share price to return to previous levels, the company’s level of debt will need to be addressed. Indeed, debt requires financing and as debt becomes an increasing proportion of TUI’s enterprise value, the value of the market capitalisation will most likely fall. Over the long term there is also scepticism surrounding the sustainability of TUI’s business model given the momentum of  online competitors such as Airbnb and Bookings.com. This competition is further compounded by the rise in budget airlines which poses additional threats to future profits.

 

The future for TUI is both clear and uncertain. Once a vaccine is distributed, the release of pent-up demand for overseas holidays is inevitable and will see increased revenues as well as the return of its loyal customer base. The potential upside for share price was shown by a 37% share price increase following the announcement of Pfizer’s vaccine trails. Despite this, the share price resurgence to pre-COVID-19 levels is far from certain, with the company also facing a significant debt burden and a dated business model. If TUI Group management can streamline operations, reduce overheads, reduce unprofitable activity and improve their online provision, TUI Group may well emerge from the pandemic a stronger company.

 

By James Harden

Sector Head: Morgan Sword

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