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In there trading, the biggest gainer in the FTSE All-Share is TUI (LSE: TUI). TUI shares are up almost 8% year to date, touching 600p. Despite this big move in the short term, I think there are a few reasons investors should be aware of as to why this is not a good time to buy. With shares down 59% in the past year, the current jump doesn’t tell the whole story.
The need to raise capital
It was recently announced that the company will raise new cash through a rights issue. In short, a rights issue is a business offering new shares to investors, usually at a discounted price. Investors can buy shares for less, which is great, but the share price will fall to a certain level (known as the ex-rights price) as more shares are in circulation.
The stock market capitalization did not change, as the higher number of shares was offset by the money raised by the rights issue.
As for TUI, my issue here is not the price of ex-rights, but why it should be an issue. The figure I saw was raising £1.6bn. It is used to pay off existing debt, including some pandemic loans.
My problem here is that if the company does well (or thinks it can have a strong 2023), the goal is to use cash flow and retained earnings to pay off debt. The fact that they have to go to shareholders and ask for money is not a good sign.
Lagging behind friends
Another reason why TUI is not on our list of travel and airline stocks to buy is because it has underperformed others in the industry.
I know the sector is going through a terrible pandemic. But some companies are showing very positive signs. For example, easyJet came out with a Q1 2023 update saying it expects to be fully profitable this year.
Of course, TUI has a bigger holiday and ancillary services business than easyJet, apart from pure flight revenue. But it highlights to me that the sector is returning to pre-pandemic levels. TUI is still behind financially, and cannot blame the current pandemic.
Have a balanced look
The main alternative in my view is a stronger than expected summer booking period. Shares jumped today after the Easter trading update. It is mentioned “Booking momentum remains encouraging”. If this continues through the summer, investors could see this as a long-term value buy from current levels.
Yes, the long-term trend (down 87% in five years) has pushed the stock to a low price. I am not dismissing this thought, but I think there are better places in the sector to invest. Therefore, I think investors should look elsewhere (like easyJet) and not at TUI to buy now.
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