UBS reckons the Spanish hotel sector is at a cyclical peak, which is bad news for package tour operator TUI AG (LON:TUI).
The Swiss bank has downgraded TUI to ‘sell’ from ‘neutral’ and slashed the price target to 1,200p from 1,600p. TUI shares were down 3.3% at 1,264p in mid-morning trading.
READ: TUI maintains earnings guidance despite hot weather leading to more staycations
The group’s RIU hotels arm is expected by UBS to see downward pressure on revenue per available room – RevPAR – in 2019, especially in Spain.
Industry market data for August and September 2018 shows lower occupancy and pricing year-on-year in Spanish Sun & Beach hotels and UBS expects this to continue in 2019.
“With 60% of hotel beds owned, RIU profits are highly geared to changes in occupancy and pricing,” UBS noted.
By UBS’s estimates, hotel profits account for 32% of group earnings before interest, tax and amortisation (EBTA).
Increased competition in the tour operator business, which UBS projects will account for 39% of fiscal 2019 profits, has been a headwind to profitability for TUI and its sector peers.
UBS expects this competition to slacken off a little but believes overcapacity in the UK is structural, while the “legacy shop network represents a disadvantage when competing against new digital peers”, UBS said.
On the way to a #plasticfree holiday: TUI Cruises launches »WASTELESS« – the plastic reduction programme. ????♻️ https://t.co/HANmqt6v4I pic.twitter.com/chQLzV2hKb
— TUI Group (@TUIGroup) October 15, 2018
“For cruises (25% of FY19E profits) capacity additions should ensure good growth going forward although higher marine gas oil prices may somewhat limit profit growth,” UBS predicted.