Over the weekend, I’ve been reading reports about how resorts in Greece, Spain and Italy are preparing to reopen. Alongside this, reports suggest that as beaches reopen in Europe, local people are flocking to the seaside. So I wasn’t too surprised to see the TUI Group (LSE: TUI) share price rise by more than 10% this morning.
Despite today’s bounce, TUI shares are still down by more than 70% so far this year, compared to a 29% drop for the FTSE 250.
Investing in this travel group isn’t without risk. But I think there’s a big opportunity too. Today, I want to explain why I think TUI shares are very likely to double from current levels.
Look beyond the headlines
Air travel, cruise ships, and package holidays could be a tough sell this summer. Social distancing rules and the threat of quarantining mean popular holiday activities will be more restricted than usual.
We could see a short-term focus on staycations this summer, especially if the weather’s good. But if you want to make serious money from shares, I think you need to look beyond these short-term concerns.
Throughout history, people have always loved to travel to places with better weather and more exotic scenery than their home country. Package holidays make these trips more affordable and accessible to people on average incomes. I just can’t see that changing.
TUI transformation
In my view, this year is likely to be very difficult for TUI. CEO Fritz Joussen plans to reduce overhead costs by 30% and cut up to 8,000 jobs. I expect his plans to “right size” the group’s operations will mean shrinking its fleet of aircraft and perhaps closing some hotels.
In addition to this, TUI is likely to become an increasingly digital business. I fear some of the company’s UK high street stores may not reopen. In my view, all of this is painful but necessary if TUI is to survive.
The company has already taken significant steps to improve its financial position. In March, TUI secured a €1.8bn government-backed loan in Germany. At the end of March, this increased the company’s available cash resources to €3.1bn, which I estimate is enough to keep the business running for five or six months.
Over the next few months, TUI will hope to generate some cash from late-summer 2020 bookings, while building up reservations (and cash deposits) for winter 2020 and summer 2021.
I think the TUI share price will double
There are some early signs of hope. Last week, TUI said that UK bookings for this winter season are up by 8% compared to the same period last year, with prices flat. Summer 2021 bookings are said to be “looking positive on small volumes.”
In my view, the group’s financial situation should allow it to return to stable operation without having to dilute shareholders in a refinancing. Although this is still a risk, I’d expect the group to raise money against its fleet of cruise ships, aircraft, and hotels first. These were valued at £3.8bn at the end of March.
I believe TUI will survive and return to profitability. I’m attracted by the group’s size and geographic diversity, as well as it’s solid track record. I see the shares recovering to 500p fairly quickly, and possibly rising higher in the future.
