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In Thursday trading, the biggest winner in the FTSE All-Share is TUI (LSE:TUI). TUI shares are up almost 8% so far, touching 600p. Despite this big short-term move, I think there are several reasons why investors should be aware of why this might not be a good time to buy. With a 59% drop in the stock last year, today’s jump doesn’t tell the whole story.
The need to raise capital
It was recently announced that the company would raise new cash through a rights issue. In short, a rights issue is when the company offers new shares to investors, usually at a discounted price. The investor can buy the shares at a lower price, which is great, but the share price will naturally drop to a certain point (known as the ex-rights price) because there are more shares outstanding.
The market capitalization of the shares does not change, as the increased number of shares is offset by the money raised from the rights issue.
For TUI, my issue here is not the ex-royalty price, but why you need the issue in the first place. The figure I saw was that it would raise £1.6bn. This will be used to pay off existing debt, including some pandemic loans.
My problem here is that if the company was doing well (or thought it might have a strong 2023), I would try to use cash flow and retained earnings to pay down debt. The fact that you have to go to shareholders and ask for their money is not a good sign.
Falling behind your peers
Another reason TUI is not on my list of travel and airline stocks to buy is due to underperformance relative to others in the industry.
I know that the sector suffered a horrible streak due to the pandemic. However, some companies are showing really positive signs. For example, easyJet It came out with a Q1 2023 update saying it expects to make a full-year profit this time.
Of course, TUI has a much larger vacation and ancillary services business than easyJet, in addition to pure flight revenue. But it stands out to me that the sector is returning to pre-pandemic levels. TUI is lagging behind in this regard when it comes to finances, and nowadays it cannot blame the pandemic.
Have a balanced view
The main alternative in my view is a stronger than expected summer booking period. The stock jumped today after an Easter trading update. He mentioned that “Booking momentum remains encouraging”. If this continues through the summer, investors could see it as long-term value buying from current levels.
Yes, the long-term trend (down 87% over five years) has been for stocks cheap. I do not rule out this thought, but I do believe that there are much better places in the sector to invest. So I think investors should look elsewhere (such as easyJet) and not TUI to buy at this time.
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