TUI AG (LON:TUI) was downgraded to ‘sell’ from ‘neutral’ by UBS as the investment bank adopts a more cautious outlook on tour operators.
The industry may see a slower than expected recovery following the coronavirus pandemic, with a potential 80% plunge in second-half revenues for TUI.
READ: TUI cancels a further 143,000 holidays, BA eyes Gatwick exit
Analysts slashed the target price to 110p from 290p, arguing the stock is pricing in neither a slow profit recovery in 2021, nor a gradual unwind of advance payments received leading to cash outflows.
Free cash flow is forecast to be a negative €3.7bn in the current financial year, with broadly zero cash generation in the next period.
Authorities may push tour operators towards locking parts of the advance payments received in trust funds, while customers may be reluctant to pay deposit months before their departure.
“Once TUI's operations are restarted we expect the operational expenditure to increase with little cash inflows as the first clients are likely to be the ones that rebook and have already made advance payment,” UBS commented.
“In hotels, we estimate break-even occupancy at 40%-50%, suggesting the first phase of the recovery is likely to generate negative/low profits.”
Shares dipped 1% to 263.4p on Tuesday in late morning.