TUI shares: should I buy now?

TUI (LSE: TUI) shares have taken a hammering over the past year. In February 2020, prior to the first UK lockdown, the price rose above 600p. But at time of writing, TUI shares are trading around 378p.  

The coronavirus pandemic is still raging, but what does this mean for TUI shares? Should I add the stock to my portfolio now? Let’s consider the investment case.

The victim

It’s safe to say that the coronavirus pandemic ripped TUI’s business apart. The lockdowns and travel restrictions meant that the UK’s largest tour operator came to a grinding halt from March 2020.

What gives me some comfort though is that prior to the pandemic, TUI opened January 2020 with record bookings. But when Covid hit, I think the main point to note is how management responded. It acted promptly and took suitable measures.

Pent-up demand

Given its prior strength and also how TUI took such swift action to respond to the pandemic, I feel that it’s in a good operational position to meet demand when travel restrictions are lifted.

The company is currently operating at reduced capacity. But I think there’s huge pent-up travel demand from consumers, which will be released when governments lift restrictions. But I stress that it’s highly dependent on lockdowns bringing the number of coronavirus cases down and a successful rollout of vaccination programmes. If this all happens, I’d expect TUI shares to soar.

Summer 2021

While 2020 was a shambles, TUI is optimistic over the prospects for summer 2021. The company expects to operate at an adjusted capacity of 80% of 2019’s travel demand. 

This means that revenue should pick up in the second half of 2021. Again, I stress that this is dependent on vaccines becoming widely available and an ease in travel restrictions. TUI’s management expects late booking behaviour for the summer 2021 season. It has already seen a pickup in recent bookings following positive vaccine news.

Liquidity

TUI, like most companies, focused on boosting liquidity and preserving cash during the pandemic. The firm suspended its dividend, implemented a programme to permanently reduce costs by €400m per annum.

In addition, it has secured a €1.8bn finance package with a group of banks, major shareholders, and the German government. At least in the short term, I’d expect it to have sufficient liquidity reserves to weather the tough market conditions. This should act as a support level for TUI shares.

But if there’s a delay in the vaccine rollout programme or cases increase again, I believe TUI will require additional support to survive.

And its debt is already considerable. At 30 September 2020, the net debt position had soared to €4.6bn. This reflects the additional financing the company had to take on to weather the coronavirus storm.

While TUI had no option other than to take the finance lifeline, at some point this debt will have to be paid off. This will take time and I’m  wary over the debt pile taking a toll on TUI’s profitability.

My view

Will I be buying TUI shares now? No. But they’re certainly on my radar. There are too many unknowns for now. The key indicators to change that will, I feel, be a consistent reduction in Covid-19 cases and a successful mass rollout of vaccines. I’ll leave the stock until the world has a better handle on the coronavirus crisis.