Dynamic Packaging And Global Expansion Will Drive Future Success

Key Takeaways

• Dynamic packaging and technology investments could drive growth by leveraging airline capacity and improving operational efficiency without increased fixed costs.
  
• Expansion into global markets and enhanced cruise and Musement offerings are expected to boost occupancy, rates, and overall revenue growth.
  
• TUI faces potential revenue and margin challenges due to dynamic packaging reliance, competitive pressures, rising costs, and uncertain bookings in key markets.

Catalysts

Provides tourism services worldwide.

• TUI is focusing on dynamic packaging--selling flexible combinations of flights, accommodations, and experiences--which could drive future growth in revenue and profitability by leveraging increased airline capacity without taking on more fixed costs.
  
• Expansion into global markets and increasing demand from regions such as the Americas and Asia are expected to fuel growth in hotel occupancy and rates, positively impacting revenues and margins.
  
• The introduction of new cruise ships, such as one with green methanol and LNG capabilities, along with higher occupancy and rates, should enhance cruise segment earnings.
  
• Advancements in the TUI Musement segment, driving more customers into TUI's ecosystem through experiences growth, are poised to increase revenue and attract long-term customers to their other offerings.
  
• Investments in technology and distribution channels, such as app sales and retail initiatives, are aimed at improving operational efficiency and customer acquisition, supporting higher net margins and earnings growth.

TUI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TUI's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 3.1% in 3 years time.
• Analysts expect earnings to reach €836.4 million (and earnings per share of €1.48) by about April 2028, up from €544.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €957 million in earnings, and the most bearish expecting €684 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, up from 5.9x today. This future PE is lower than the current PE for the GB Hospitality industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.75%, as per the Simply Wall St company report.

TUI Future Earnings Per Share Growth

Risks

• TUI's reliance on dynamic packaging and maintaining a flat risk capacity could lead to challenges if demand for dynamic packaging does not meet expectations, potentially impacting revenue and overall profitability.
  
• The inclusion of Ryanair and its impact on holiday package dynamics could introduce uncertainty in profit generation within Markets & Airlines, affecting net margins if the integration does not contribute positively to the bottom line.
  
• The slowing of bookings in key markets like Germany and concerns about negative bookings in the U.K. pose a risk to TUI's planned revenue growth, potentially impacting its EBIT growth target.
  
• The competitive landscape in the U.K., with competitors substantially increasing capacity, may pressure TUI’s market position and pricing strategy, which could negatively affect its revenue and earnings.
  
• Incremental investments and rising costs in Markets & Airlines, as suggested by the increased FTEs and potential wage inflation, might not be fully offset by projected revenue gains, leading to a risk of lower net margins.

Valuation

• The analysts have a consensus price target of €10.367 for TUI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €16.0, and the most bearish reporting a price target of just €7.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €27.0 billion, earnings will come to €836.4 million, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 9.8%.
• Given the current share price of €6.3, the analyst price target of €10.37 is 39.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.