Hargreaves Lansdown review28 Mar 2023 21:27
Our view
The way rights issues work means it can trigger sharp market movements. That's why there's been a downwards move in TUI's valuation. But it's important to remember this is a technicality.
The proportion of your share in a company doesn't change if you take up your rights. Because all shareholders are offered new shares in proportion to their current investment, investors who take up all their rights end up with the same share of a bigger pie, rather than a bigger slice of the same pie.
All-in, we think the rights issue is a very positive move. Reducing debt and strengthening the balance sheet is good news for investors. (More on that later). While the debt pile's being addressed, it's important to consider the wider business before deciding what, if any, action you wish to take.
TUI has 1m more passengers than the same time a year ago. By anyone's estimations, that's good going. Bookings for Winter and Summer are improving as pent-up travel demand helps buoy revenues.
And TUI doesn't just run flights, it has a much wider package holiday business. In some ways that's what makes it more defensive - there' more to offer and plenty of cross selling opportunities. But maintaining pre-pandemic levels is also a much higher priority, the drains on cash when you have planes and huge hotels (not to mention cruise ships) to fill are enormous.
We're especially encouraged by TUI's ability to increase its prices. That shows how important travel is to customers, and the strength of the brand. We can't knock progress, but remain wary on some specific risks.
The most important thing to consider is higher-than-average liquidity risk. Debt levels are much higher than we'd like and are especially eye-watering when looked at as a proportion of profits. Immediate concerns have been alleviated, but continuing to get debt back under control is a priority, and means dividends are off the table for now.
A cost-of-living crisis means it's almost impossible to map demand accurately too. Sunny getaways are far from front of mind for much of the core demographic these days. Summer holidays tend to be booked at shorter notice, so only time will tell how well TUI manages to sell the rest of its summer programme.
TUI was concerned about over-capacity in the wider industry before the pandemic. This is an ongoing concern in our opinion, despite the challenges faced by the sector in the last couple of years. TUI doesn't appear to be trimming its own capacity in readiness for an economic contraction and instead relies on a hybrid approach of own and third-party operated flights, which reduces, but doesn't eliminate, the risk caused by an over-supplied and overly competitive industry.
The final thing to keep in mind is that TUI's largest shareholder is Russian billionaire Alexey Mordashov. Mordashov has been sanctioned by the EU because of repercussions from the war in Ukraine. This isn't a flashing red indicator, but being reliant on a higher-ris
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