Morgan Stanley lowers TUI price target on cash flow fears

Morgan Stanley downgraded TUI to 'equalweight' as it expects the travel group's heavy investment programme will dilute cash flow and earnings per share.

The rating on the Anglo-German tour operator was cut from a previous 'overweight' rating and its price target cut to 1,100p from 1,200p.

While the company has had a strong year and is on track once again to exceed its 10% EBIT growth target, and in 2017 it should benefit from further merger synergies, new cruise ships, savings in Germany and France returning to a profit, there were still doubts.

Morgan Stanley thinks TUI will spend the €1.5bn proceeds from the HotelBeds disposal "on a heavy capex programme rather than M&A or cash returns, meaning the EPS dilution may be permanent, and FCF will remain poor".

Other downsides are the likelihood the UK will suffer from the weak pound, there is more competition coming from Jet2in the UK and Ryanair in Germany and that rebranding Thomson to TUI in the UK could bring some risk.

Although TUI looks cheap on a 1.0 times p/e-to-growth ratio and offers an attractive 5.5% 2017 dividend yield, peers such as Thomas Cook and the airline stocks have derated "and while TUI's Hotels and Cruise operations are more highly rated, its FCF is weak".