Tui Travel's shares pay a decent dividend, but don't be in a rush to buy them, says Phil Oakley.
The business
Tui Travel is Europe's largest tour operator, selling holidays to 20 million customers a year. It has 3,500 travel shops and a fleet of 145 aircraft. In Britain it trades under the recognisable brands of Thomson and First Choice. The company also acts as a middleman, selling hotel rooms and excursions as well as providing services to the cruise-line industry.
It provides a number of specialist holidays, which include sports activities such as skiing and boating, as well as educational travel. Tui is building up its tour operations business in emerging markets such as Brazil, India, Russia and China. Its sales reached £14.7bn in 2011.
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The history
The company was created from the merger of First Choice Holidays and the tourism business of the German company Tui AG in 2007. The original Tui business can trace its history back to the early 1920s. First Choice began trading in 1973 under the name of Owners Abroad. Up until the 1990s the German side of the business was known as Preussag and was mainly an industrial and transportation company. It then began creating tour-operating companies across Europe, as well as buying Thomson Travel in Britain in 2000.
In 2002, Preussag was renamed Tui AG after buying the owner of that business. Following the merger the new company has had to cope with weak economies and political turmoil in some of its key markets. It has also had to fight the growth of low-cost airlines and do-it-yourself holidays over the internet. An accounting blunder in 2010 temporarily damaged the firm's reputation with investors.
Profits have held up rather well, though. The company has cut costs, paid down debt and turned around some of its underperforming businesses. It has also been helped by a lot of smaller travel agents going out of business and the financial difficulties of big players, such as Thomas Cook.
The chief executive
Peter Long has been in charge since 2007, having previously been chief executive of First Choice holidays. He started out as an accountant but is now a veteran of the travel industry. He knows all about its ups and downs, having worked for International Leisure Group, which went bust in the early 1990s. His experiences there goes a long way towards explaining the prudent way in which Tui Travel is now run. He was paid £1.6m last year.
Should you buy the shares?
You might not use a travel agent to book your own holiday, but lots of people still do. That said, Tui is having to work very hard to keep its customers. It's done quite a good job of moving with the times and is selling more of its holidays over the internet, especially in its Nordic business.
That it owns hotel-room booker LateRooms.com means it's well placed to help people who want to do things for themselves. Tui has also been keen to protect its customers' wallets and has made First Choice holidays all inclusive. Pushing more of its exclusive specialist holidays has also boosted profits.
But there are challenges ahead. Tui's profits have been helped by lots of cost savings and turning around previously weak businesses. There's probably more money to come from these sources, but the gains will run out eventually. Tui has to carry the large costs of its travel agent shops and aeroplanes all year round. It has to make sure it sells enough holidays to do this without flooding the market and encouraging discounting. It also has a reasonable chunk of interest on debt to pay and carries a pension scheme that is underfunded.
Overall, although Tui is doing relatively well, it's difficult to believe the business can grow rapidly. It sells its holidays to customers that live in fragile European economies and who can always use the internet to purchase package deals or parts of such a holiday from somebody else. While the shares don't look particularly expensive and pay a decent dividend, we wouldn't be in any rush to buy them.
The numbers
Stockmarket code: TT
Share price: 236p
Market cap: £2.6bn
Net assets (March 2012): £1.4bn
Net debt (March 2012): £1.2bn
P/e (current year estimate): 10 times
Yield (prospective): 5.0%
What the analysts say
Buy: 10
Hold: 12
Sell: 2
Average price target: 210p
Directors' shareholdings
P Long (CEO): 3,774,589
J Lundgren (deputy CEO): 882,964
W Waggott (FD): 1,112,785
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