The recent rally in TUI AG (LSE:TUI) shares might make the stock look attractive. The TUI share price has gained 20% over the last three months, but is still 85% down from its 2018 highs. I think, however, that TUI’s financial situation makes its shares unattractive as an investment proposition.
Operations
The cause of TUI’s financial problems can be found in its income statement. The company’s costs have declined more slowly than its revenues since the beginning of the pandemic. This is because TUI has still had to maintain its aircraft, buildings, and cruise ships, as well as pay staff to do so. These are TUI’s major costs and they apply whether or not the company is collecting revenue from passengers.
As a result, a 66% decline in revenues has moved TUI from making an operating profit of £576m to losing just under £1.5bn. Looking forward, I expect this to reverse. As TUI’s operations resume, I think that its profits will rise faster than its revenues. The trouble is, I also think that the costs the company has incurred will cause a lasting problem for TUI as an investment.
Debt
As an investor, I’m looking for companies that can return cash to me within a reasonable timeframe. TUI’s current financial situation—and specifically, its debt levels—give me reason to doubt that it will be able to do this. This makes me think that TUI shares are not an investment opportunity for me.
The biggest concern that I have is that TUI has to use a lot of the money it makes paying interest on its debt. At the moment, TUI pays around £390m annually in interest. Obviously, TUI made a loss last year, which is entirely understandable. But I’m not sure that the situation improves enough even if TUI’s earnings recover to their 2018 (pre-pandemic) levels.
In 2018, TUI made an operating profit of around £576m. Even if the business recovers to that level, the company’s interest payments would still amount to around 67% of its operating income. And that is just the interest on TUI’s debt—it doesn’t include the company paying down the debt itself, which has increased by 168% since 2018.
The situation is made worse by the rising interest rate environment. In order to combat inflation, the Bank of England has raised interest rates twice since December. For a company like TUI, this makes the possibility of dealing with their debt by refinancing it less attractive. As someone thinking about investing in TUI shares, I think that this means that the company will have to pay its debt down sooner, which will further inhibit its ability to return cash to shareholders.
Conclusion
In my view, there is reason to think that TUI’s business will bounce back well as the restrictions associated with the pandemic end. In the meantime, the company’s share price might continue to increase. From an investment perspective, however, I think that the company’s financial situation is such that it will be a long time before it is in a position to provide an acceptable return. I also believe that there are other UK companies that provide more attractive opportunities. As a result, I’m avoiding TUI shares at all costs.