TUI (LSE: TUI) gained during the November stock market jump, on the back of those early successful Covid-19 vaccine results. The bullishness didn’t last long, though. And from its November high, the TUI share price has now fallen back 25%.
I expect investors began to realise that the completion of a vaccination programme is still a long way away. The latest guidance suggests it will take until around September. And those more likely to jet off on faraway holidays will be among the last to get the jab. Then we have the spectre of new virus strains. And that’s hammered the travel business again, at least in the short term.
But what does it all mean for TUI specifically? Could the TUI share price really double in 2021? Well, the shares jumped 80% to their peak in November. Over the same period, the FTSE 100 only gained 20%. That suggests to me that there’s pent-up demand for TUI, and for other travel shares. What we saw in late 2020 might have been a bit of a false start, but I can see less restraint when the travel business finally gets off the ground again.
Could the TUI share price double?
So yes, I really do think there’s a realistic chance the share price could double in 2021. But let me explain why I’m not buying. The reason I follow TUI is that I want to find solid recovery candidates for 2021. But I think any strong recovery this year would overvalue the shares, and it could be short-lived.
A doubling of the share price would put it back close to where it was before the pandemic struck. So here’s the big question I ask myself: is TUI today worth as much as it was back in February 2020? I don’t think it is.
It’s currently engaged in a big capital raise, attempting to place new shares to the value of €545m. I expect that will be successful, and it looks like it should be enough to keep the company going until we’re back to business as normal. I also think it’s a better plan than raising new debt. That might be hard to achieve now anyway and emerging from the crisis with a massive debt mountain could hamper the company for years to come. Oh, and TUI has actually taken on a fair bit of new debt already.
The effect of dilution
But a new share issue will dilute existing shareholders. In fact, it will almost double the number of shares in existence. What does that suggest to me about the TUI share price? Well, my instinctive feeling is that a fair valuation should be around half the early 2020 level (assuming the company gets back to the same level of business). And that’s very close to where it is already.
My Motley Fool colleague Roland Head has calculated that a recent TUI share price of 395p would be equivalent to around 710p pre-placing. And we have to go back to early 2019 to see that kind of pricing. My search for 2021 recovery stocks must move on.
