I can understand why people aren’t rushing to invest in the travel sector currently as the situation looks very bleak with Covid worsening and further travel restrictions and lockdowns being added on a daily basis around the world. But we also have to consider that the valuation of the well established and previously successful companies in these sectors, which have been hit hard by the virus, isn’t really about what happens over the next few months, but more so their future, assuming that they are able to survive long enough to actually have one of course. The market is already forward looking to some extent and is attributing some value to the fact that at some point in the future people will be going on holiday in large numbers again, and revenue will be rolling in for these businesses, but currently I still think that in a few years time we will look back and won’t be able to believe the low levels that they traded at, and that we had a chance to buy them at that price, especially when taking a longer term view.
For the last year many people have been saving money - especially the millions who have been furloughed - and providing they don’t all lose their jobs eventually, when travel becomes possible again many will be itching to get away with the family and I would expect to see holiday bookings rocket, especially for those travelling to destinations within Europe. TUI AG (TUI) was doing very well prior to the pandemic and started 2020 with record bookings and looked like it was about to have a very strong summer, but the arrival of the virus led to a suspension of all of its operations for several months, and even when it did manage to restart again in June, bookings were significantly lower than normal. That meant that for the year up until the end of September 2020 it recorded a pre-tax loss of €3.129 billion, compared to a €691 million profit for the previous year. It also saw the dividend suspended - it had been €0.54/share in 2019 - and net debt soared to more than €4.55 billion.
I am so not a 2021 Superdry customer but I really back Julian Dunkerton says Chris Bailey HERE
As a result of agreeing additional support from the banks, at the end of November last year it had liquidity of €2.5 billion and has just completed a €1.8 billion refinancing package which included a €544.6 million rights issue. In addition to the RI, it also agreed a €1.091 billion package with the German Economic Support Fund, plus a €200 million revolving credit facility. There isn’t too much point going through the accounts for last year in detail, as other than showing why the need was there to refinance, they aren’t particularly indicative of the future potential or how the company could perform after Covid is gone or becomes controllable and travel starts to return to normal. That return towards normal seems to have suffered a bit of a set-back at the moment, but in my view still largely boils down to the vaccine and when we reach a situation where few people are actually dying from the virus. That should start to happen once all of the most vulnerable - who currently make up most of the deaths and hospitalisations (around 15% of the population make up over 85% of those figures) - have been vaccinated, which I would expect to be around late March/early April in this country, and not too dissimilar in Europe, as long as things go to plan. If that is the case, then we may see people prepared to book holidays this summer – especially if we see a relaxation on the quarantine rules for those returning to the UK, or for entering certain countries, although testing before you fly may well continue I suspect.
I know that TUI does holidays all over the world, including flights and owning hotels, plus offers various cruises, but I do see that European market as an important first step towards recovery and persuading people that it is safe to go away again. None of us know what is going to happen in the coming months, as there have already been so many twists and turns, and not many last April/May thought we would be back in another lockdown now. So there is no point trying to predict revenue, profit and the like for the company over the coming year, as even internal estimates by those who know the business inside out could end up being wildly out, and for me this simply boils down to whether or not you see the industry eventually recovering, and if you see enough financial strength in TUI that it will be there to take advantage when that does happen. A lot of my investments tend to be based on the figures, but I also believe that we need to adapt to take into account the impact of Covid, and that many companies that have been badly hit and appear weak on paper, will ultimately recover well, and I see TUI in that category.
The theoretical ex-rights price of the shares amounts to somewhere around the 315p area, and the shares were last around 398p having had a decent bounce. For a while the rights, which are tradeable, were actually priced at significant discount to the prevailing market price of the shares, so there was actually no point buying the shares – you were far better off buying the rights and that saw some weakness and a drop to just below 340p, before that arbitrage gap disappeared and the share price bounced strongly. I’m not necessarily saying I would be rushing out to buy the shares now as I think that we may see some further weakness to come – especially once retail traders receive their shares from the RI and possibly cash some of that in for a profit, and even more so given that some here will have suffered substantial paper losses over the past year. We may also see some general market weakness over the next month or two as well, which could easily drag TUI shares down with it temporarily. But I definitely view it as one to add to your watchlist (I’ve added it to my mine) as a longer term recovery play and if you also see potential here, to buy into any further dips, and even more so if it gets anywhere close to the recent lows again. Even if you do end up paying more than the theoretical ex-rights share price, which seems likely if you do want to buy in as I’d be surprised to see it that low again, you are buying into a business that is in a much better funding position than it was previously.
Filed under: TUI AG, TUI, St James House, [email protected] Capital, Superdry, Mountfield, Corero
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