The TUI (LSE: TUI) share price has risen by 70% from October’s low of 105p. Solid bookings in summer 2022 (91% of 2019 levels) seem to have encouraged investors to believe that the German travel group is on the road to recovery.
I’m pretty comfortable that this business has survived the pandemic and will get back to normal. But is this the right time to buy?
TUI shares appear to be reasonably priced today, trading on just nine times forecast earnings. However, I don’t think the shares are as cheap as they might seem. Let me explain why.
TUI’s still got problems
TUI’s survival has come at a price. The company had to borrow heavily to stay afloat during the pandemic.
Net debt was €3.4bn at the end of September 2022. Management expects this number to be “broadly stable” during the current financial year. In other words, they don’t expect to make much progress with debt repayments this year, despite a significant rise in expected profits.
This isn’t an ideal situation, as I think the group’s debt is still too high to be comfortable. Sure enough, just before Christmas, TUI unveiled a fairly drastic plan to repay some of its loans.
Not as cheap as it looks
When a company already has too much debt and needs to raise cash, one option is to ask shareholders for cash, in exchange for new shares.
That’s what TUI plans to do in 2023. The company hopes to raise €1.6bn-€1.8bn this year by issuing new shares. That’s roughly 50% of the group’s current market capitalisation. A big fundraise.
If the company issued these new shares at today’s price, the total number of shares in issue would rise by around 50%. That would mean earnings per share fell sharply — after all, total profit won’t change.
My sums suggest that if we factor in TUI’s planned share sale, the firm’s shares are probably trading on a forecast price-to-earnings ratio of at least 14. Probably higher, because new shares are often sold below the current share price.
What I’d do now
TUI plans to sell the new shares through a rights issue at some point this year. That means existing shareholders will be allowed to buy a certain number of new shares, for each existing share they own.
I think this is a sensible plan, but I never buy shares in an indebted company that’s about to hold a rights issue. First of all, I don’t know how the new shares will be priced. And I don’t know how how much I’ll have to invest to maintain the size of my shareholding.
If I don’t buy shares in the rights issue, my holding will be diluted. I’ll own a much smaller part of the business than I did before.
I’ve also found that rights issue shares often fall sharply when they’re admitted to trading, as investors offload unwanted new shares.
In my experience, the right time to buy TUI might be after the rights issue, when the new shares start trading. However, that will depend on whether European holidaymakers continue to spend freely this year.
For now, I think TUI shares are best avoided.
