TUI AG (TUI1) ORD REG SHS NPV

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TUI’s Markets & Airline division saw bookings and average selling prices (ASP) rise 6% and 3% in the fourth quarter summer period, respectively. Bookings for the new year have also started strongly, with 33% of capacity already sold and ASP up across all markets, helping offset higher costs.

Holiday Experiences (Hotels & Resorts, Cruises, and Musements) remain on track with management expectations, as all segments posted growth in the fourth quarter. However, due to planned renovations, hotel capacity is set to decline by 2% in the first half of the new year.

TUI reiterated full-year guidance that underlying operating profits will grow by “at least” 25% (2023: €977mn). Consensus among analysts is more optimistic, expecting growth of more than 30% this year.

Medium-term guidance calls for underlying operating profits to grow between 7-10% annually.

The shares rose 2.5% following the announcement.

Our view

A strong final quarter means TUI’s management is comfortable with the market’s view on underlying operating profits, which points toward more than 30% growth for the full year. Consumers continue to prioritise travel, which is playing into TUI’s hands. Higher prices and occupancy rates in cruise ships and hotels have been a big driver in this year’s improved profitability.

Positive booking momentum has continued into the new year too, as has progress on selling prices. That’s also been the case for the Airline segment, with a third of winter seats already sold. More than 90% of fuel and currency exposure has already been hedged, meaning there should be little in the way of surprises in the near future.

In some ways, having a wide package holiday business makes it more defensive - there's more to offer and plenty of cross-selling opportunities. But the drains on cash when you have planes, huge hotels and even cruise ships to fill are enormous, so occupancy rates remaining high across the business comes as welcome news. We’re especially pleased with progress in the cruise business, which has massively helped profits.

Debt levels have been a concern in the past, but the group has done a good job of getting them under control. Net debt as a proportion of cash profits is importantly moving into much more attractive territory. Continued movement on this front will be key to any potential return of dividends, which are never guaranteed. Bear in mind now that the shares are no longer listed in London, any dividend income may now be subject to withholding tax.

We can't knock progress but remain wary of some wider risks. A persistently challenging environment means it's still tricky to map demand accurately. The question is whether recent booking momentum can continue. A lot of this will be outside TUI's control, but the powers that be will certainly be hoping for a soft economic landing.

The valuation sits towards the bottom of the peer group, which we view as undemanding if the expected improvements in profitability are to be taken at face value. Its diverse offering and low valuation offer both upside potential and some downside protection, making it one of our preferred names in the sector. But the cyclical nature of the industry, as well as the sensitivity of demand to macro-events, means there are likely to be more ups and downs ahead.

The author holds shares in TUI.

Environmental, social and governance (ESG) risk

The transport industry is medium risk in terms of ESG, with European firms managing them better than others. Carbon emissions, product governance, and quality & safety are the biggest risk drivers. Other key areas are emissions, effluents & waste, labour relations, and employee health & safety.

According to Sustainalytics, TUI’s management of ESG risk is average.

TUI has a very strong whistleblower programme and has appointed board-level responsibility for overseeing ESG issues. However, ESG disclosures fall short of best practice, and there is no reference to linking executive pay to ESG targets.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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