Shares in German travel giant Tui AG [TUI] soared nearly 10% on Wednesday as it revealed a substantial return to profit in its most recent financial year.
The company, which sells package holidays across Europe and became a dominant player after the demise of Thomas Cook, made a €551 million pre-tax profit in the fiscal year ending September 30, following an €146 million loss the prior year. Tui’s reported earnings before interest and tax more than tripled to €999 million. Earnings per share went from a negative €0.45 to €0.74 in a year.
Revenue rose 25% to €20.67 billion from €16.55 billion at a company that spans cruises, hotels, resorts and airlines.
Tui’s return to profit was expected given the boom in European travel this summer and higher prices achieved by flight and hotel operators. Airlines like EasyJet and Ryanair have also reported bumper profits recently, while specialist UK operator On the Beach (OTB) has seen shares rise 25% in the last week. But Tui’s beat expectations.
Looking ahead, it said that demand for winter bookings remained strong, even for countries like Egypt, which shares borders with Israel and has taken refugees displaced from Gaza.
TUI’s in The London Departure Lounge
The full-year results contained a sting in the tail for UK investors, with plans to delist the company from the London Stock Exchange (LSE).
Tui is looking to upgrade to a “Prime Standard” listing in Frankfurt with inclusion on the MDAX index – just below a main DAX listing – which could be put before shareholders in February 2024. The company said that existing investors had approached the board about the current dual listing.
AJ Bell’s investment director Russ Mould says this may not be a massive blow to UK investors given Tui is very much a German company, which was bailed out by the government there during the pandemic. The UK government resisted calls to provide support to travel companies, but they’ve thrived since.
“You can see the company’s reasoning, as it feels there is more trade struck through Frankfurt and it reports its numbers in euros for good measure,’ Mould says.
“Its claim that index inclusion in the MDAX would be beneficial is harder to judge as the firm is already in the FTSE 250 and chasing passive, index-tracking flows is not necessarily a good idea, as that can work for or against you.”
Coincidentally, Germany’s DAX index hit a new record this week while the FTSE 100 is effectively flat on the year; the FTSE 250, of which Tui is still a constituent, is down 3% since the start of 2023.
Others have taken a much dimmer view of the delisting news. Commenting on X, formerly Twitter, 7IM partner and Regionally co-director Justin Urquhart Stewart said the plans reflected poorly on the LSE itself.
“TUI leaving London Stock exchange? If they do this is another example of LSE ineptitude,” he said.
“The UK need[s] an effective capital raising and trading market. The LSE has failed in this and especially for smaller and growing companies. In my view [we] no longer have [an] effective stock exchange.”
Our Market Strategist’s Take
Seen in isolation, Tui’s plans are logical. But they come after a number of companies have planned or already decided to exit a London listing, a blow to the city’s reputation as a global financial centre. The UK government is particularly sensitive to this issue as it’s seen by most as an unwelcome effect of Brexit.
As Morningstar’s EMEA market strategist Michael Field says, the trend has been a “slow drip” that has brought the issue to the forefront of investors and policymakers alike. The US has been the preferred destination for many UK delisters, and Field says this is down to the perception of more favourable regulation and two other key factors: valuation and rebalancing. Here’s what he says about both.
Valuation
On the first, the FTSE 100 has a bad reputation when it comes to growth, with many investors viewing the index as “old world”. They have a point. Of the five largest stocks in the index, three are mining or oil and gas firms, and one is a bank. As a result of the inevitably lower growth that comes from these industries, the market applies a material discount on the valuation of the index. In fact, the FTSE 100’s price-to-earnings is around 14, a third lower than the S&P 500, which stands at 21. Ultimately, management teams are remunerated on share price performance, and a quick move to a higher valuation is always worth pursuing.
Rebalancing
Rebalancing is the other big, and somewhat overlooked, factor. Specifically, the involvement of pension funds is important. In the past UK pension funds held upwards of 20% of their equity exposure in UK equities, despite UK stocks representing less than 5% of the global index. As pension funds finally rebalance, UK stocks are being sold down to shift further into other geographies, most notably the US. For LSE-listed firms, switching listing can also be a useful way to play this shift in allocation.
