TUI (LSE:TUI) shares have taken a beating over the last five years. Since April 2018, the FTSE 250 travel and tourism company has witnessed its share price crumble by 89%.
That’s perhaps unsurprising given the combination of global travel disrupted by Covid-19 and the company’s longstanding debt pile.
So far, these factors have proved potent enough to deter investors like me from buying in.
But with the group taking positive steps to lower debt, could now be a good time for me to take the plunge and buy some cheap TUI shares for my portfolio? Let’s take a look.
Rights issue to the rescue
In March, TUI announced the launch of a rights issue to raise up to €1.8bn. The aim is to repay loans given to the company by the German government during the pandemic.
Flash back to September 2022 and the company’s net debt stood at a staggering €3.4bn. So, to combat this, proceeds from the new shares will be used to reduce interest costs and and lower debt by €1bn.
As a result, the rights issue is a positive move in my eyes. After all, reducing debt and strengthening the balance sheet was going to be paramount for the company going forward.
With TUI’s debt pile being addressed, I’m happy to now consider the wider business before deciding what action I should take.
Clawing back pre-Covid capacity
In early April, the company reported that bookings and trends for the Easter holidays confirmed strong demand across all markets for sunshine destinations.
Over 500,000 customers were expected to holiday with TUI over Easter, with load factor expected to be in the range of 95%. Impressively, that’s broadly in line with pre-Covid levels.
This means the company now has 1m more passengers than at this time last year.
Debt levels are still a concern
But it won’t be plain sailing for TUI. Despite the recent rights issue, the company still comes with substantial liquidity risk.
The group’s debt levels are still much higher than what I’m comfortable with. In fact, they look especially concerning when looked at as a proportion of profits.
In my view, sustained efforts to get debt back under control must remain the number one priority for TUI. Any deviation from that mission represents a major risk.
In light of the above, if I was to hoover up some TUI shares, I wouldn’t be expecting dividends any time soon.
A bright future outlook?
That said, I’m fairly confident that TUI’s prospects aren’t all that dim in the long run.
For example, I’m encouraged by the company’s ability to increase prices. To me, this proves the underlying strength of the brand and demonstrates customers’ willingness to travel even amid cost-of-living constraints.
Another thing I like about TUI is that it doesn’t just run flights, but has a much wider package holiday business.
Therefore, considering that customers don’t want to give up their holidays, I think TUI’s vast offering of package and all-inclusive deals positions the company well to cash in on the rebound in global travel.
Nevertheless, I personally think there are other travel stocks with a stronger investment case at the moment. I’ll be passing up on the opportunity to buy TUI shares for now.
