Tui: Putting Das Boot In

[dropcap]E[/dropcap]ven a well-bonused banker, buying a BMW for ready money, cannot splash the cash quite like Fritz Joussen. The boss of Tui is contemplating purchasing two ocean-going ships with his spare change. The FTSE 100 travel group has an appetite for hard assets at a time when ‘capital light’ is a mantra for some rivals. Sailing against the tide has advantages. Perils, too.

Tui is the world’s largest holiday company. But most revenues come from customers in colder, wetter parts of western Europe such as Germany where Tui is headquartered. Sales, though rising this year, have been flatter than Benelux due to weak economies and terror attacks at holiday resorts. The group has depended on self-help to bolster profits which rose 42 per cent to €290m over nine months, as measured by earnings before interest, tax, depreciation and amortisation.

Tui has cut costs, partly by absorbing its UK affiliate. It has clung on to customers despite competition from online rivals. The group is investing in hotels and ships, reasoning that if you offer something special, you retain pricing power. By favouring cruising and the year-round Caribbean, Tui also reduces the seasonality of its business.

Mr Joussen is feeling flush after making €770m from selling a niche holiday business and shares in a shipping group. Without adding to modest debts, he could afford to buy cruise liners called Mein Schiff 1 and 2 (the name Das Boot having already featured in a drama about a U-boat). Tui’s fleet has grown to 20 vessels. The balance sheet value of ships, hotels and other hard assets has jumped from €2.6bn to €4.2bn in three years.

Returns on assets are thus set to stay low compared with the likes of capital-light groups like hotelier IHG. That does not matter if rising free cash flow supports higher dividends. But high overheads would dent payouts if holidaymakers shun the resorts and sea lanes where Tui is strong. Shares on a relatively low forward earnings multiple of 12 foghorn the risks.