Growth Dries up for TUI Group – Profit Warning Drops Share Price 20%

By | 7th February 2019

TUI Group (LON:TUI) yesterday issued a trading statement which took some time to bite: with a subdued end to yesterday the share entered a bit of a dive today and was down almost 20% by midday after a concerted sell-off:

This is rather remarkable for a couple of reasons: such price movement on a FTSE share is surprising. So many analysts cover these companies so news tends to be not much of a surprise – for instance, the warning that growth was slowing could have been guessed at. In real terms this slices off a huge amount of the value of the company – over 1 billion pounds at the time of writing.

Another remarkable reason was that the ‘warning’ was not even pictured as such, and although disappointing, it was seeded with good news, that underlying profits would be ‘broadly’ in line with last year, which was a record.

Perhaps a nervousness has crept in because Thomas Cook have been struggling and issued their own profit warning, not once but twice. In the space of two months their share price has been decimated, and they are reduced to hawking around the airline part of the group to concentrate on hotels (which is more of a gamble than their previous business model, now made obsolete by the internet).

The Warning

The warning comes in an ad-hoc February 6 update. In it, it says:

TUI AG now expects FY19 underlying EBITA1 rebased at constant currency to be broadly stable compared with the record performance in FY18 of EUR 1,177m2

There seems to be a bit of a broken promise as the second part states:

Consequently, we are not reiterating our guidance of at least 10% CAGR in underlying EBITA at constant currency for the three years to FY20.

The bad news, it seems will drift into this year;

34% of the Markets & Airlines Summer 2019 programme has been booked to date3. Bookings are broadly in line with prior year, however, margins are not. This is driven by a continuation of the sector headwinds already discussed at our FY18 results presentation in December 2018, in particular:

  • negative impact from the extraordinary hot weather in 2018, resulting in later bookings and weaker Markets & Airlines margins;
  • shift in demand from the Western to Eastern Mediterranean, which has created overcapacities in certain destinations such as the Canaries, resulting in lower margins for Markets & Airlines; and
  • continued weakness of the Pound Sterling, making it difficult to improve margins on holidays sold to UK customers.

Previously, it was anticipated that these headwinds would impact primarily H1 (Winter), however we are seeing from current bookings an additional impact on H2 (Summer), and have updated our guidance accordingly.

The rest of the warning deals with how TUI intend to deal with this which is a ‘jam tomorrow’ combination of cost cutting, moving into new markets, and up-selling higher margin items such as activities.

The Business

TUI is the result of massive consolidation across the travel sector as the internet broke apart the traditional travel agents package. The scale of the group is truly colossal, owning 6 airlines, 16 cruise liners, hundreds of hotels and thousands of travel agents, all of which have become centralised under the TUI brand. Older folk may recognise that once high street giants such as Thomson Holidays and First Choice are now part of this group.

As a company, their focus is mainly in Europe although they have interests all over the world where people take holidays in the form of hotels. In that sense the vertical integration of their company is very similar to Thomas Cook, although on a much larger scale: TUI are approximately twice as big.

A delve down into their results also appears to show different fortunes. The latest results show:

These look great, although there may be some window dressing involved. Essentially, their model is similar to Thomas Cook, and their margins are also very similar: with the competition the way it is nowadays there isn’t the possibility to have large margins.

The FY18 report also contained this gem:

This relates back to the profit warning today. It seems that this promise is now in the bin, and there are no other guidelines given to when this growth might restart again. What is puzzling, however, is the speed of which it came about:, the results were published on 30/9/18, so Christmas must have been a very poor period for bookings.

Looking further into their results, they have products across all fronts, and cruises are the biggest growth segment for them: up 26.7% – no surprise there, seeing that a low-cost airline cannot replicate this. That said, their airline operations are also an important part of their group, producing the bulk of its turnover, but also the lowest margins.

But unlike Thomas Cook, TUI are not in dire straits financially. The last notable merger was four years ago, and required a large issue of equity and debt, but since then the group have repaid much of that and built on its asset base. As of the last report, debts include a $300m bond, and almost $800m in borrowings, although this is dwarfed by the cash position in excess of $2bn, although most of this money would be received up front for services that need to be provided. There is a small overall net debt position because of aircraft leases.

Reconciliation of profit to cash shows this in the summary cash flow:

This is not surprising at all: an integrative travel business such as this is quite capital intensive. Aircraft and ships need to be heavily maintained, and properties need to be regularly refreshed to keep them competitive. That is before the decent dividend being paid back to shareholders.

Comment

TUI look cheap on a valuations basis, and despite the level of spending needed, there is large operational gearing in the business. This means that a key metric for them is continuing to get sales and fill their aircraft, hotels and ships so that they run with the minimum of slack.

However, the recent profit warning has given an indication that this is not happening, or rather that further increases can only be got with reductions of prices and margins. Brexit hasn’t been blamed, and rightly so: it seems doubtful that this would change holiday plans for most.

I would view TUI as a much better bet than Thomas Cook, but this is not saying much. Despite the stellar figures posted in the last annual results I feel that the reduction of momentum here could have bad effects for sentiment. With a chunky dividend and further macro worries in the pipeline there could be a good case for seeinh the price go even lower. 2/5.

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