TUI: Q2 2023 Clarifies The Forward Positive Thesis (OTCMKTS:TUIFF)

Dear readers,

I’ve been cautious about TUI (OTCPK:TUIFF) for the past few articles, going from a SELL rating to a “BUY”, but definitely one of the more speculative varieties in terms of how I usually rate companies. While the travel and vacation sector is not in any way an unattractive sector, it nonetheless comes with challenges that cannot and should not be underestimated.

With regard to this, I am now looking at TUI AG again, and giving you my opinion on the company’s latest reported results, the 3Q23/9M results. The company has an upside – the question is if the risk is worth your capital given everything else that for most of us considering FX, is available.

TUI AG – Upside exists, but consideration/care is warranted

My latest article for the company came in March – and the company has crashed back down another 50% since that time, showing its status as a speculative and difficult investment to make in this environment. That is, despite my “BUY” rating, one of the first things I said in that particular article was:

However, the near-term risks and issues are not to be underestimated.

(Source)

Because those risks are material.

But, let’s begin with company report-related positives – because there’s plenty to be had here. The company has strong demand levels, 5.5M customers in terms of bookings, which is up 400,000 since the previous year, and the company has achieved an airline load factor of 93%.

People are going back to vacation, and this is causing some enjoyable top-line and bottom-line trends for TUI. The company’s revenues and EBIT are either stable or up – EBIT is no longer negative, and revenue is up to over €5.2B for the quarter.

All of this means that the company is likely to deliver significant EBIT and revenue increases compared to the previous year. Then again, that previous year was one of the worst in company history, so failing to do so would certainly have been a problem.

This shows us the clear company trends. As does the M&A segment.

As you can see, despite material improvements, any massive realistic profitability is still some way off. The company is still in the midst of its strategic program, including leveraging the hotel platform, its strong cruise brands where TUI has already been ordering new vessels, and growing shares in markets/airlines, as well as building its TUI Musement segment.

TUI is in a position to take advantage of the resort and hotel sell-off in the post-COVID-19 fallout. There’s an abundance of assets for sales, or parties interested in JV structures. The company is foremost here, with its already-existing examples like the RIU platform – and its HANSAINVEST, focused on the overall global hotel market.

TUI has already executed 2 deals here, in Zanzibar and Cape Verde.

Unlike with other companies, I spend more time looking at customer satisfaction here. And numbers here are solid.

Customer retention is always a sore point for these companies. Typically, you don’t hear much about positive experiences. It’s usually about things like delayed flights, horror hotels, and other negatives. However, TUI has actually seen customer retention and rebooking rates of upwards of 40%, which in context is actually quite positive.

The company is also integrating and using more and more with its app, and unlike competitors, TUI is in a position in terms of scale to really use this app to drive sales going forward. While I myself prefer the intimacy and personal relationship of a travel agent (also a human that’s “responsible” for my experience), it seems that many appreciate the convenience of app bookings and the like.

Fundamentally speaking, the company has also significantly improved its overall debt and leverage. TUI has improved net debt, both as a result of downpayment and as a result of EBIT expansion. The company’s net debt is now below €2.3B, improved by over €1B on a YoY basis. Credit institutes and banks are also reacting to the positive trends, giving the company both a rating upgrade (to B, but still), and a successful extension of the RCF for another 3 years from now.

The company is trying to pursue its asset-light growth strategies, using JV structures and other models to ensure maximal capital efficiency. That is, of course, to be put next to the fact that TUI operates both airlines and cruise ships, some of the most demanding assets in existence in terms of service and operating costs.

Still, that this strategy lays the foundation for profitable growth, is not something I’m going to argue with, because it is in fact backed up by hard data.

On the other hand, TUI is of course one of the more impacted businesses in terms of climate, wildfires, and other issues. Rhodes saw significant wildfires, which resulted in stopped arrivals, bookings, and holidays for a period, and caused the company to reinforce its staff, and book extra flights – causing a negative impact of €25M for cancellations, lost margins, compensation, repatriation flights and assorted welfare costs. However, as of the latest results, operations have resumed to a normal level.

The clear picture for the quarter though, is a return to normalized levels for bookings, and the company’s various segments delivering very solid results when considering the overall macro.

This has resulted in a YoY 9M change of €405M higher than the previous quarter. The company expects further increases in revenues and significant increases in EBIT.

The main uncertainties in this model come from specific floating interest rates levels (due to debt). Aside from those, I would look at the company’s deliveries of specific growth targets – namely margins, accelerating growth, looking at the state of its balance sheet, and focusing on continued cash flow. Any deterioration in any of these metrics should be viewed with care.

The company having reduced its debt is addressing one of the more stressing points. If we see similar developments for the next few years, then the company is likely to be able to be a net-debt neutral state in 2-3 years – though this would require growth similar to the rate we’ve seen here, which I consider to be unlikely. I therefore expect more along the line of 4-6 years to complete “normalization” for TUI from a post-COVID-19 perspective.

Still, it’s a positive that the company, as of 3Q, is not utilizing any of its revolver capacities. Not in the cash and not in the KfW revolver, the total of which comes to an amount of €2.6B. The company thus has plenty of cash available.

TUI valuation – plenty to like, but opportunities exist

My PT in my last article for TUI came to €14/share. As of this article, I’m not shifting this PT because this was a long-term PT. Even if there are arguments as to why this company may not appreciate as quickly as that, I still believe that there is an upside to be had here.

You also have some options for investing here, with regard for specific tickers. There’s a TUI ticker on the LSE, as well as the TUI1 ticker for the German market. I stick to the German one. My recommendation here would be to avoid the ADR if possible, as it’s somewhat thinly traded.

TUI is in a terrible situation still, and the company’s historical accuracy trends and records do not lend themselves well to high confidence here, scoring a negative miss ratio of over 65% for the past 10 years.

Still, the upside to basically any sort of normalized P/E here is massive.

My €14/share PT might seem high, but in context €14/share is not even a 12.5x P/E, which would imply closer to a €16/share PT, and which would be on the lower part of historical P/E ratings.

Analysts are more positive than you might expect with this sort of decline in the share price. The analysts following the company give us a low PT of €6.8 and a high of €21/share. Out of 8 analysts, 6 are at a “BUY” rating – again, despite all the negativity here.

The consensus seems to be that the market is severely overreacting to what can be considered a momentary weakness in the face of massive potential growth, albeit with a high rate of overall uncertainty.

Even on a conservative 12.5x P/E, the upside here is over 66% per year, or 191% until 2025E on a 15x P/E. Considering the company’s long-term average of over 17.5x P/E, that’s an upside in the case of reversal of almost 95% per year, or 300% in 3 years. That’s one of the highest potential RoR’s that I currently cover in any company.

However, as you can see, it’s also one of the riskiest. Even my other risky investments such as KION (OTCPK:KIGRY) don’t really compare to this one, because TUI’s impairment during COVID-19 and similar periods was so severe, and essentially required a government bailout. And bailout companies are always a question if you want to invest in.

If we could be more confident here, then I would allocate much more capital to this investment. But the fact is that this company remains a risky play – though far from as risky as it once was. I don’t see bankruptcy as being remotely likely for this business. Not any longer. I do question how quickly the company can turn things around though, and how the profit from a post-turnaround TUI would look.

For that reason, I’m keeping my “Spec BUY” rating for this company – but I do consider it a spec “BUY”, and I do have a position here that I intend to keep.

Maybe in 2-3 years, I can write an article about how this investment resulted in triple-digit RoR – that is my ambition, but we’ll have to see.

Thesis

My thesis for TUI is as follows:

• TUI AG is one of the most appealing travel companies in all of Europe. Unlike many of its peers, it has survived – although the fact that it has survived is one of the best things that can currently be said for TUI.
• I believe the combination of current bottom-level valuation combined with a relatively well-established trend of normalization only has one logical eventual outcome – an upside.
• However, the risk inherent to such an investment makes it incompatible with my current conservative portfolio.
• Still, as a speculative position, I cannot rate TUI anything but a “BUY” here. The company’s cash flows are “too good” long-term, and the company’s turnaround seems to be working.
• My PT is €14 – but keep in mind that this is a speculative and high-risk play – nothing else. I now have a position in the company, and accept the risk – albeit a small position.

Remember, I’m all about:

• Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
• If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
• If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
• I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside-based

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.