Transformation Into Tech-Integrated Global Leisure Marketplace Fuels Growth

Key Takeaways

• Expansion into new markets and unique holiday experiences should enhance revenue growth and pricing power, improving net margins.
  
• Significant tech investments and sustainability efforts are expected to cut costs and boost operational efficiency, positively impacting earnings.
  
• Anticipated costs and execution risks from expansion alongside fleet update issues could strain cash flow and pressure net earnings and profit margins.

Catalysts

Provides tourism services worldwide.

• TUI is advancing its transformation strategy to become a global curated leisure marketplace, focusing on dynamic packaging and integration of technology platforms, which is expected to drive future revenue and margin growth.
  
• The company is expanding its portfolio of unique and differentiated holiday experiences, including exclusive hotels and cruise offerings, which is projected to enhance its pricing power and improve net margins.
  
• Significant investments in technology, such as the expansion of app functionalities and direct hotel connectivity, are anticipated to lower distribution costs and increase operational efficiencies, positively impacting net margins and earnings.
  
• The expansion into new geographic markets, such as Latin America and Asia, aims to grow TUI's customer base and diversity in terms of source markets, which should drive revenue growth.
  
• TUI's commitment to sustainability initiatives and a transition towards more environmentally efficient operations, including investments in greener technologies, is anticipated to reduce long-term operating costs and potentially increase earnings.

TUI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TUI's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 3.3% in 3 years time.
• Analysts expect earnings to reach €856.0 million (and earnings per share of €1.45) by about December 2027, up from €507.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €986 million in earnings, and the most bearish expecting €625 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2027 earnings, up from 8.3x today. This future PE is lower than the current PE for the GB Hospitality industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 5.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

TUI Future Earnings Per Share Growth

Risks

• The company faces significant headwinds in the Markets & Airline segment due to anticipated increases in costs from Sustainable Aviation Fuel (SAF) and Emissions Trading Systems (ETS), as well as general cost inflation, which may erode net margins and impact overall earnings.
  
• The financial health of the Western region within the Markets & Airline segment remains weak, driven by one-time effects and restructuring needs, suggesting a risk to achieving profit improvements, potentially affecting EBIT growth.
  
• There are delays in Boeing aircraft deliveries, impacting the fleet update plans and resulting in higher pre-delivery payments (PDPs) which could strain cash flow and lead to higher costs in the airline division, affecting net earnings.
  
• The company's expansion into non-European markets involves execution risks, which might lead to initial startup costs and uncertainties impacting revenue growth and profit margins.
  
• TUI's growth strategy and transformation require significant investment, which could burden cash flow and debt levels, potentially leading to negative impacts on future earnings until these investments yield financial returns.

Valuation

• The analysts have a consensus price target of €10.12 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 €6.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €25.8 billion, earnings will come to €856.0 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of €8.25, the analyst's price target of €10.12 is 18.5% 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.