Broker Panmure Gordon believes TUI’s (TUI) dividend could be at risk. Analyst Mark Irvine-Fortescue is not comforted by the all-inclusive holiday operator's latest trading statement, reiterating that investors should sell the stock.
Despite bookings for summer 2017 meeting expectations, the analyst is concerned about free cash flow being insufficient to cover the forecast €0.70 payout for the year to 30 September 2017. That works out at about 60p per share.
Shares in TUI nudged 1.3% lower to £11.20.
Irvine-Fortescue says: ‘The valuation looks vulnerable to us, not heeding increased capital intensity, hence our sell rating - the catalyst being return on capital employed (ROCE) rolling over.’
Since 2014 the business has changed significantly, ploughing money into capital intensive parts of the business, such as cruise ships.
Unfortunately, TUI needs more money for these businesses to generate growth. Irvine-Fortescue is worried that ROCE trends will be rolled over from this year into the future, or in other words, more cash will be needed to fuel growth leaving less available for shareholder distributions. This, the analyst believes, could act as a ‘catalyst for share price underperformance.’
Management is still optimistic about achieving earnings before interest, tax and amortisation growth (EBITA) of 10% for the full year 2017, which Shares highlighted in February.
More demand for holidays in places such as Greece, the Canary Islands and longer-haul destinations are offsetting slumps elsewhere. North Africa and Turkey capacity has shrunk due to ongoing terror attack fears. TUI has sold out 48% of summer capacity, as of 19 March.
