TUI shares: what to expect from Q3 results

Investors are hoping TUI can start to turn things around following a tough first-half. With TUI shares having lost ground this year, we have a look at what to expect from its third quarter results.

TUI Source: Bloomberg

When is TUI’s earnings date?

TUI will report its third quarter (Q3) results on Tuesday 13 August. They will be released at 7am (UK time) and cover the three months to the end of June 2019.

What does the City expect?

Having already issued two profit warnings in 2019, investors are hoping TUI can keep the ship steady when it releases its third quarter (Q3) results. However, most of the issues that have hit the company hard this year remain unresolved – whether that be Brexit's effect on consumer confidence and sterling, overcapacity in some key markets, or the grounding of Boeing's 737 MAX aircraft.

Read more on Boeing's warning that it may halt 737 Max production as planes remain grounded

TUI had ambition to grow underlying earnings before interest, tax and amortisation (EBITA) by a compound annual growth rate (CAGR) of 10% over the three years to the end of September 2020, but scrapped that goal in February 2019 after realising annual earnings in the 2019 financial year would be broadly flat from the record delivered the year before. It said people were holding off from booking trips away because of Brexit and the weakness it has caused in the pound, which has made it more expensive for UK tourists to go abroad. It was then dealt an even bigger blow following the grounding of 737 MAX aircraft, which took 15 of TUI’s planes out of action. It originally warned this would result in a 17% decline in annual underlying EBITA if the planes were back in the air by the middle of July but, with the aircraft still out of action, it subsequently warned underlying EBITA would decline by about 26%.

It may be some bitter reassurance, but most of these problems are not confined to TUI – which operates flights, cruises, package holidays and experiences - and are hitting its peers just as hard. The European airline industry has too much capacity on offer by too many companies, which has driven many smaller airlines to bankruptcy and sparked a wave of consolidation. The aftermath of the two fatal Boeing plane crashes has left many out of pocket, with Ryanair recently announcing it could cut up to 900 jobs – including 500 pilots – because it is operating fewer aircraft as the result of the 737 MAX’s being grounded.

Package holiday providers are also succumbing to tough competition and weaker consumer demand. Just last week we saw UK minibreak provider Superbreak and its sister company Laterooms cease trading after failing to find a buyer. Thomas Cook, TUI’s longstanding rival, reported lower revenue and a huge £1.45 billion pre-tax loss in the six months to the end of March 2019, and said debt had swelled over 40% during the past year. It has had to ask its largest shareholders to inject £750 million just to survive the upcoming winter season.

Learn more about what’s in store for Thomas Cook after Fosun cash injection

TUI managed to maintain its downgraded guidance for the full year when it released its Q2 results, but there was little reason to be optimistic going into Q3. Many metrics were worse in Q2 than they were in Q1. Revenue in the first half of the financial year rose 1.7%, but declined 1.4% in Q2 to imply the situation was deteriorating. The decline in customers using its airline accelerated to 6.7% in Q2, and forward bookings were down 3% year-on-year – with a meagre 1% lift in prices unable to absorb huge cost increases, heavily eroding margins. The shift of Easter into Q3 rather than Q2 also didn’t help.

TUI, as one of the largest tour operators in Europe, is trying to survive the current downturn and hold its share of the market with a view of being in a strong position to capitalise once the market picks up again. The main job of the Q2 results will be to prove that it has survived the worst and that green shoots are on the horizon – a big ask considering the current state of play. Having said that, a Bloomberg consensus suggests the market is expecting a year-on-year improvement in profitability but a lower top line.

TUI Q3 earnings consensus

Q3 2018 (YoY) Q3 2019 consensus
Revenue €5.01 billion 4.95 billion
Adjusted EBITDA 218.1 million 180 million
Adjusted net income 112.5 million 140 million
Adjusted EPS €190,000 €300,000

What to watch out for in TUI’s Q3 results

Change in full-year guidance

While it is clear there has been continued weakness in key markets heading into Q3, investors will be hoping that TUI can keep the ship steady and reiterate its guidance for the full year. Following the latest downgrade, TUI is aiming to deliver annual revenue growth of 'around 3%' and is expecting underlying EBITA to fall by 26%, mainly thanks to the costs of having its 737 MAXs grounded. TUI has said net capex and investment will be between €1 billion to €1.2 billion, up from €800 million in the 2018 financial year. It also expects to end the financial year at the upper end of its leverage ratio of 2.25 to 3 times, having ended the previous year at 2.7 times.

Any changes to guidance, particularly for earnings, will have an impact on dividends for the 2019 financial year. TUI paid a €0.72 dividend in the 2018 financial year and this year it will, according to its policy, move in line with underlying EBITA. That implies the dividend could be cut by more than a quarter.

Update on Boeing

Although TUI and many others in the industry were hoping Boeing 737 MAX aircraft would be back up and running fairly quickly, the aircraft remain grounded. TUI’s 150-strong fleet of aircraft includes 15 737 MAXs, meaning 10% of its fleet has been taken out of action. The company has tried harder than most to understand the impact on the business and communicate its expectations with investors.

The fact it had a contingency plan in place when the planes remained grounded longer than initially expected should be applauded, but securing praise while warning earnings will drop is difficult. It has said it expects to book a €300 million one-off hit as a result. With the aircraft still grounded, there are justified concerns that sum could grow further. However, TUI said it didn’t expect to suffer any further financial hits when the US Federal Aviation Administration demanded the aircraft remain grounded in late June. Although TUI seems confident the €300 million it has budgeted is enough to get through this financial year, investors should look for any news about how it could potentially impact the business in Q4 and beyond.

There is a chance TUI and others will be entitled to compensation for their troubles down the line, but this does little to soothe fears over the short-term impact. TUI has orders for eight more 737 MAX planes but has so far refused to scrap the orders altogether. ‘Cancelling and not taking deliveries is something very different. For the time being, we just don’t take them’, TUI’s executive chairman, Freidrich Joussen, said earlier this year.

Read more on Airbus vs Boeing: what you need to know about the stocks

How to trade TUI’s Q3 results

In May 2018, TUI shares hit €20.46 to reach their highest level since the financial crash. But they have had done little but fall since then. TUI shares have dropped 56% from that peak and are down by just under one-third since the start of 2019.

Although there is still a large amount of risk around TUI and the wider industry, the huge sell-off has led many to believe TUI has been oversold. Last month, Stifel said the fact TUI had to abandon its original guidance had caused an over-zealous sell-off of shares. That view is echoed by others, with nine out of 14 brokers believing TUI is undervalued compared to just four that think it is adequately valued and one that believes it is overvalued, according to a Reuters poll.

TUI shares: broker recommendations

Broker recommendation
Reuters – 6 August
TUI
Strong buy 6
Buy 3
Hold 4
Sell 1
Strong sell 0
Average recommendation Buy

TUI’s Q3 results: hoping for improvement in a very difficult market

This financial year has not been kind to TUI. Its main job is to maintain guidance and convince shareholders that better times are around the corner. Many of the issues plaguing TUI are out of its hands: it can only try its best to adapt to the impact of Brexit and the grounding of Boeing aircraft. TUI is one of the more vertically-integrated players, which should, in theory, put it in a better position to adapt as it can shift its focus to match demand, demonstrated by its efforts to sell more experiences at a time when holidays are slumping.

Read more about how the value of the pound has changed since Brexit

With consolidation taking hold and the pressure squeezing out rivals, TUI hopes it can hold its share of the market during the current downturn and remerge a stronger business when conditions improve.

There is little to be optimistic about in the short term, but these fears may have been overdone. Brokers believe TUI has survived the worst and that the severe sell-off in shares has left it undervalued, prompting a buy rating. There is clearly some degree of confidence behind TUI’s scale and ability to adapt in a challenging market, and the fact it pays a dividend and is outperforming its rival Thomas Cook (down 93% since May 2018) should also help rally support.


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