UK markets closed
  • NIKKEI 225

    29,100.38
    -584.99 (-1.97%)
     
  • HANG SENG

    29,135.73
    +29.58 (+0.10%)
     
  • CRUDE OIL

    62.61
    -0.77 (-1.21%)
     
  • GOLD FUTURES

    1,779.20
    +8.60 (+0.49%)
     
  • DOW

    33,821.30
    -256.33 (-0.75%)
     
  • BTC-GBP

    40,893.15
    +416.58 (+1.03%)
     
  • CMC Crypto 200

    1,296.41
    +62.00 (+5.02%)
     
  • ^IXIC

    13,786.27
    -128.50 (-0.92%)
     
  • ^FTAS

    3,920.05
    -76.60 (-1.92%)
     

I’d avoid the TUI share price and buy other cheap UK shares instead

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
Rupert Hargreaves
·3-min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
New Ways of Investing - Hands Only Using Smart Phone
New Ways of Investing - Hands Only Using Smart Phone

In my opinion, the TUI (LSE: TUI) share price is currently one of the riskiest in the UK. There are a couple of reasons why I believe this to be the case.

Riskiest UK shares

The coronavirus pandemic has winded the global travel and tourism industry. Unfortunately, it looks as if it could be several years before the industry returns to 2019 levels of activity.

Granted, there are some signs of life in the industry, and travellers who are booking holidays seem to be willing to spend more, but all figures point to the conclusion that total sales will be substantially lower this year than in 2019.

The market could recover in 2022. As of yet, it is too early to tell. But even if it does, TUI faces an uphill struggle. Over the past year, the company has been bailed out not one but three times by the German government. These bailouts have placed restrictions and limitations on the business, such as limits on management bonuses and dividends.

As such, it seems to me that it will have to go above and beyond 2019 levels of profitability to repay outstanding borrowings and remove limitations. This could be an impossible challenge for the business. It may mean that the TUI share price lags the market for years.

This is only my interpretation of the situation. It may be able to renegotiate with its creditors to improve its financial situation. Management may be able to lift restrictions on the business in this scenario. What’s more, the travel market may rebound faster than analysts expect. If the market recovers to 2019 levels of activity in the second half of 2021, and consumers are spending more, the outlook for the TUI share price may dramatically improve.

Still, I would avoid the stock for the time being considering its uncertain outlook. I’d buy other cheap UK shares instead.

Alternatives

As a way to invest in the UK economic recovery, I think there are plenty of other cheap UK shares that offer a better risk-reward ratio than the TUI share price. A good example is the banking giant NatWest Group.

I think the outlook for this enterprise has improved markedly over the past six months. The pandemic has hurt the business, but the impact has been nowhere near as bad as expected. As a result, regulators have allowed banks like NatWest to resume cash returns to investors.

While the outlook for the financial sector has improved, it is not entirely out of the woods. Low interest rates will weigh on profit margins for years, and a spike in business failures could place further pressure on its balance sheet. Still, I would buy the bank as part of a diversified basket of cheap UK shares as a recovery investment.

Another company I would add to my portfolio is Compass. This global catering specialist reported a sharp decline in revenue for 2020. However, people will always need to eat. So, I believe that while the group suffered significantly last year, it should return to growth in the years ahead. Challenges the organisation faces include a high level of debt and an extension of coronavirus restrictions. These could hold back growth. Due to these risks, I’d own the business as part of a diversified basket of UK shares.

The post I’d avoid the TUI share price and buy other cheap UK shares instead appeared first on The Motley Fool UK.

More reading

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Compass Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021