TUI AG (LON:TUI) has been downgraded to ‘hold’ from ‘buy’ by analysts at Berenberg, who warned that the travel giant is “making a strategic error” by pursuing new growth areas that could leave its capital expenditure at high levels.
The German bank, which also cut its price target to 950p from 1,200p, said the FTSE 100 firm’s realignment over the last four years, shifting its focus toward cruise and hotel operations and away from its core business, “had not delivered the growth it promised” and that going forward the company should be focused on its existing businesses rather than looking to expand.
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“We believe that the group’s risk profile is increasing, with markets and airlines deteriorating faster than expected”, Berenberg said, adding that firm’s outlook for 2020 was “disappointing” given it was being boosted by tailwinds form investments and the demise of its biggest rival, Thomas Cook, in October.
“With what could be interpreted as a lack of focus on the core tour operator, major ongoing headwinds and a failure to deliver on its promises from the last round of growth, we are struggling to understand why management seems committed to driving further growth from investments in new areas rather than focus on the core operations of the business”, they said.
However, despite these headwinds, Berenberg refrained from rating the stock at a ‘sell’, saying there was “no escaping the significant value” from a joint venture between TUI and cruise operator Royal Caribbean, as well as “the prospect of a windfall from Boeing” in the form of recovery payments as a result of the grounding of the 737 MAX aircraft, of which TUI owns 15 with another 72 on order.
TUI shares fell 2% to 958p in mid-morning trading on Thursday.