TUI - Destination undecided

All,

Please find our all-new, if preliminary analysis, on TUI here.

In our first take, we are in particular focusing on the monthly and quarterly working capital movements and their impact on liquidity. The aim is to understand early how much traffic needs to return for the company to manage within its means.

75% is not enough:
We have modelled a 50% of revenue for Q4 FY21 (July-Sept), stepping up to 75% for Oct-Dec 21 quarter. This leaves sufficient liquidity for financial year 2021 (September), but unless revenue returns above 80%, the business will require additional funding (December low point). So far, we do not see that as guaranteed. We note that TUI has a significant market capitalisation, but an additional cash requirement could have consequences.

Deleveraging:
TUI is extremely leveraged to a recovery in the European tourism market. Any recovery will be accompanied by a large increase in customer deposits enabling the Company to de-lever. The business has unwound c.€2bn of working capital from lower customer deposits, but under a recovery would rapidly deleverage. Additionally, most analysts acknowledge that margins are likely to improve versus 2017-2019 levels given the significant reduction in costs, more vertically integrated offering and pent up demand. At return to 2018/19 revenue levels, the business deleverages from operating cash plus working capital movements.

Summer 2021 - will it happen?
However, the downside is precarious. TUI raised an additional €400m via Convertible bond to bolster their liquidity, so soon after an extensive bailout package from the state, via WSF/KfW. Our model does show that the Company has sufficient liquidity in the coming months, but that is predicated on the tourism market opening up from July 1st onwards. The current level of restrictions may delay that date.

We will continue to monitor the situation across Europe prior to taking a position in TUI.

Happy to discuss.

Tomás

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E: tmannion@sarria.co.uk
T: +44 20 3744 7009

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www.sarria.co.uk