TUI AG (LON:TUI) was downgraded to ‘sell’ from ‘hold’ by Berenberg as debt is expected to balloon by €2bn, reaching “unsustainable levels”.
The target price was slashed to 350p from 950p as analysts expect the travel agent to raise equity to lower its debt levels, even in the event that the Hapag-Lloyd deal closes, which “leaves the shares unattractive”.
READ: TUI plans operations overhaul with 8,000 job losses
Earlier this year, TUI agreed to sell the Hapag-Lloyd luxury cruises arm for €1.1bn to its joint venture with Royal Caribbean Cruises.
Berenberg said TUI is heavily reliant on the dividends it gets from its joint ventures, which are likely to be at minimal levels for the next two years, depriving the firm of €245mln per annum.
The FTSE 250-listed firm is also facing weak consumer spending, while there are additional costs coming from the €1bn worth of vouchers issued upon cancellations during lockdowns.
“The cash flow of TUI’s consolidated business is weak after the company meets its interest, tax and pension top-ups,” analysts said.
“This will be exacerbated even in 2021 by the prospect of a materially weaker macro environment and while the company will seek to reduce capex, it will, in our view, leave TUI unable to make any meaningful inroads to a debt level that we expect to sit around €7.5bn, more than €2bn higher than recently reported.”
Shares shot up 6% to 468.75p on Tuesday morning.