ii view: TUI confident in its business model

TUI maintains its 2019 profit estimate, but current challenges are likely to persist into 2020.

Trading update ahead of full-year results

• Reiterating current FY underlying profit guidance for an approximate 26% fall
• Challenges seen in FY 2019 are likely to persist into FY 2020

Chief executive Fritz Joussen said:

"Our vertically integrated business model proves to be resilient, even in this challenging market environment. Our Holiday Experiences business continues to deliver strong results. Meanwhile, our Markets & Airlines business faces a number of ongoing external challenges such as the grounding of the 737 MAX aircraft, airline overcapacities and continued Brexit uncertainty. The Summer 2019 season is however closing out in line with expectations and we therefore reiterate FY19 underlying EBITA guidance.

"These external challenges will continue in FY20 - therefore, we will focus on becoming more cost competitive in our Markets & Airlines business to protect and extend our market share where possible. Going forward, our two key digital strategic initiatives will deliver greater customer reach in new markets complementary to our existing markets. TUI is well-positioned to become an integrated digital tourism platform business."

ii round-up:

TUI AG (LSE:TUI) is a major leisure and tourism company employing over 70,000 people.

Listed on the London, Frankfurt and Hanover Stock Exchanges, the company operates across two broad segments. 

Holiday experiences includes its cruise ship business, hotels and resorts and destination experiences. It operates over 380 of its own hotels. 

Markets and airlines include its airline operation and tour operators broken down into the three geographical regions of Northern, Central and Western. Its tour operator brands vary from airtours in Germany to First Choice in the UK. It has a fleet of around 150 aircraft. 

For a round-up of this trading update, please click here.

ii view:

With so many factors outside of management's control potentially influencing performance such as terrorism, fuel prices and currency movements, the holiday business can be a volatile and high-risk industry in which to invest. 

For TUI itself, the demise of rival Thomas Cook (LSE:TCG) reduces industry capacity, bringing some likely modest near-term upside to earnings. 

For investors, consumer confidence going forward remains key. Brexit and even a possible German recession couch accompanying cautious management outlook comments. A historic dividend yield of around 7% still draws the eye, but analyst forecasts suggest a possible cut to something nearer 5% (not guaranteed) over the next year. On a valuation basis, the forward price earnings (PE) ratio currently sits above the three-year average. 

Positives: 

• Integrated business model
• Diversified asset portfolio
• Thomas Cook's collapse reduces overcapacity

Negatives:

• Factors outside of management's control can hinder performance
• Possible dividend cut
• Thomas Cook's collapse may reduce consumer confidence to book package holidays

The average rating of stock market analysts:

Strong hold