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It’s not surprising that in the aftermath of Thomas Cook’s collapse this week, share prices for rival Tui have risen. The holidaymaker’s share price was 903.20p at the time of writing, down slightly after an initial ten per cent gain on Monday.
Thomas Cook crashed spectacularly into liquidation under a £1.7 billion mountain of debt, leaving 150,000 British holidaymakers stranded. So, with one competitor out of the marketplace, is now a good time to take a chance on TUI?
The travel industry has been besieged by problems in recent years, and investors might be concerned that TUI is heading down the same path as its rival. Despite this recent gain, TUI’s shares are still down 30% over the past 12 months, as the internet becomes the booking mode of choice for sunseekers. The holiday firm is implementing a plan to move its business to a more comprehensive online platform, but some have suggested that TUI is late to the game on that front.
Despite the turbulence in the package holiday market, TUI is closing out the summer in line with expectations, and it has reiterated its full-year underlying EBITDA guidance of up to -26%. It’s estimated that if TUI pick up £2bn of revenue from their fallen rival, it could add an extra 4 per cent to group profit.
Thomas Cook’s collapse has given TUI an opportunity to pick up extra revenue, but analysts are still not completely confident of its long-term prospects. Although the tour operator has closed in line with expectations, just last month it reported a fall in profits for the third quarter, thanks to the unexpected grounding of Boeing 737s following two crashes. TUI has stated that this will cost them around EUR 300m and it does not know whether Boeing will compensate as yet.
The looming probability of Brexit is also shaking investors and analyst’s confidence in the travel industry. Currency fluctuations due to the uncertainty of Brexit are hitting the travel industry hard – Tui estimates it will lead to a 4% price rise for its customers, and there are many that will opt for a staycation rather than brave the exchange rates.
There is also the risk that its rivals collapse has shaken holidaymaker’s faith in package operators across the board – it has, after all, been difficult to miss the headlines of stranded travellers and dream trips in tatters. And although TUI’s market cap is about twice the size of Thomas Cook’s, it is still shouldering a debt burden of EUR 1.96, up from EUR 576m the previous year.
There’s a mix of opinions on TUI, and whether the tour operator can claim Thomas Cook’s share of the market. TUI’s stock is trading at just 11.2 times forward earnings, with operating margins of 3.4% and yield of 5.3%. Much will depend on the outcome of Brexit, and the success of TUI’s new online strategy but some analysts are optimistic. Others are taking a more cautious view though – analysts at Jefferies have reiterated their ‘underperform’ rating and many remain unconvinced that Thomas Cook’s collapse and a new online strategy will be enough for a swift ascent.
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