Morgan Stanley downgrades TUI and slashes target, sees growing risks to dividend

Analysts at Morgan Stanley downgraded their recommendation and target price for shares of TUI AG on Tuesday, telling clients that they expected the travel operator's guidance for the 2020 financial year to be "wide" and below consensus, due to costs related with Boeing's 737 MAX and uncertainty around demand more generally.

Hence, they cut their estimate for the company's earnings per share in 2020 by 13.0% and for its earnings before interest and taxes by roughly 10.0%.

A return to service for the 737 in December now looked "unlikely" meaning that the related costs were expected to come in closer to €150.0m instead of €50.0m, assuming a return to service in April.

Under a worst case scenario, with the 737 grounded for all of 2020, associated costs would rise to €350.0m, meaning an additional €50.0m cost on financial year 2019's €300.0m.

On the flip-side, and in a 'bull' case scenario, Thomas Cook's collapse could result in a roughly 30.0% bump-up in earnings per share, although that depended on many factors, the investment bank said.

"However, this depends on many factors,not least the UK economic environment not deteriorating, competitors response (Jet2is also adding capacity), and consumer confidence in package holidays. Near-term, TUI is cautious, and is likely to increase marketing costs and (it told us) reinvesting to improve its technology systems," the analysts wrote in a research note sent to clients.

"This could mean the benefit of this capacity increase is not immediately obvious, and certainly not in FY guidance [...] so we think the FY20 EBITA guidance range could be very wide."

The uncertainty around what Thomas Cook's collapse may mean was expected to contribute to the wide guidance, together with the high degree of uncertainty in the UK "even if Brexit is resolved" because of the resulting shift to later bookings and its impact on margins.

And that, Morgan Stanley said, meant another "weak" year of free cash flows in 2020, which meant there was a risk that the dividend could be cut again by around another 30.0%.

Morgan Stanley's forecast was for financial year 2020 EBIT between 10.0-30.0% below consensus at €0.8-1.0bn.