TUI Travel (TT.) is brimming with confidence. It told the City in May it would make more than expected this year, and four months later Europe's largest tour operator remains on course to deliver its promise. A series of significant technical factors have come together, too, which if combined with earnings upgrades, possibly just weeks away, could propel the shares quickly skyward. But, amazingly, recent share price weakness, caused by higher fuel prices and turmoil in Egypt, means investors can still buy TUI's shares on the cheap.
- Growth ahead of plan
- Earnings upgrades possible soon
- Strong technical indicators
- Attractive dividend yield
- Weakness in France
- High fuel costs
An underlying operating profit of £76m in the third quarter beat consensus forecasts, despite the early Easter dumping £11m of revenue in the previous quarter. Strip out the phased cost of returning empty planes at the end of the season - so-called empty leg accounting - and profit jumped 18 per cent to £87m. Crucially, the owner of Thomson and First Choice had made an "encouraging" start to the winter season. Both volumes and prices are up with 21 per cent of UK holidays and 26 per cent of Nordic winter breaks already sold.
Only in France did bookings lag capacity. Management admits turmoil in Egypt means it will not break even there until 2015, a year later than expected. TUI, however, is flexible and can shift capacity about. No wonder, then, it remains "very confident" of growing full-year profit by "at least" 10 per cent even before an anticipated £25m-£30m currency benefit. That's ahead of its five-year plan for between 7 per cent and 10 per cent, a conservative estimate, according to some analysts given the rapid growth in online sales.
TUI TRAVEL (TT.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 340p | MARKET VALUE: | £3.8bn | |
| TOUCH: | 340-341p | 12-MONTH HIGH: | 402p | LOW: 223p |
| FORWARD DIVIDEND YIELD: | 4.3% | FORWARD PE RATIO: | 11 | |
| NET ASSET VALUE: | 122p* | NET DEBT: | 74% | |
| *Includes intangible assets of £4.62bn, or 413p a share | ||||
| Year to 30 Sep | Turnover (£bn) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 13.5 | 289 | 19.0 | 11.0 |
| 2011 | 14.7 | 360 | 23.6 | 11.3 |
| 2012 | 14.5 | 390 | 25.8 | 11.7 |
| 2013** | 14.9 | 440 | 29.1 | 13.2 |
| 2014** | 15.2 | 482 | 31.9 | 14.5 |
| % change | +2 | +10 | +10 | +10 |
Normal market size: 5,000 Matched bargain trading Beta:1.4 **Barclays estimates, adjusted PBT and EPS figures | ||||
Indeed, broker Shore Capital reckons TUI is about £6m ahead of the £540m of profit implied by company growth estimates for the current year. What's more, £7m of savings are slated for the fourth quarter and some improvement in the underlying business is likely, too. We'll get a better idea in a trading update on 26 September, four days before TUI's year-end. If the news is good, Shore Capital sees scope to upgrade 2013 earnings estimates from 28p to 31p and to 34p for 2014.
That would put TUI's shares, which are down 15 per cent since early August, on a forward PE ratio of 11 - it was 15 last December - and to just 10 in 2014. That's a discount to arch-rival Thomas Cook (TCG) where restructuring still has to play out. That makes little sense given the cyclical recovery now under way. Yes, the shares have found support at the 200-day moving average, but they remain technically oversold. In fact, the last time the relative strength index (RSI) was this low (June 2012) TUI's shares rocketed from 160p to 400p.
We're not suggesting they will do quite so well this time, but there's no better time of year to buy the travel operators. A focus on short-to-medium haul holidays where chronic overcapacity often meant heavy discounting has, in the past, led to underperformance between April and September. And the seasonal trend persists, despite a greater focus on higher-margin long-haul trips which typically get booked earlier.
