Tui shares rally as Morgan Stanley highlights attractive valuation

Travel operator Tui saw its shares rally on Thursday as Morgan Stanley bumped its stance on the stock up to 'overweight' from 'equalweight' following the year-to-date drop in the share price, as it highlighted an "attractive" valuation.

MS noted that the stock is down 33% year-to-date, which is a re-rating of about 20% on top of the earnings per share downgrades that followed the company's profit warning in February.

The bank said that while there has been high insider buying from the chairman, chief executive and Spanish hotel partner Riu, investors remain worried about further downgrades, the dividend and balance sheet.

However, MS argued that the dividend and balance sheet appear secure. "We raise various red flags over Tui's earnings quality, noting weak free cash flow conversion due to the high level of JV/associates and elevated capex. Yet the dividend is around 1x covered, and there is significant headroom to the debt covenants, with decent liquidity."

It also pointed out that the stock offers a dividend yield of 8.2%, above its price-to-earnings of 7.6x, which is a "rare crossover" and makes the valuation attractive.

Morgan Stanley cuts its price target on Tui to 1,250p from 1,350p, noting 63% upside potential.

At 1320 GMT, the shares were up 5.4% to 811.80p.