TUI's recovery faces a washout and Kingfisher could benefit from tighter lockdown conditions

“European markets staged a small recovery rally on Tuesday with investors flocking to two of this year’s hot sectors, healthcare and technology,” says Russ Mould, Investment Director at AJ Bell.

“In the UK, the FTSE 100 trades 0.3% higher at 5,823 with Just Eat Takeaway, Ocado and AstraZeneca among the stocks in positive territory. Interestingly, investors were also happy to bid up the commodities space with energy and mining stocks advancing.

“The price of oil and metals can be economic bellwethers and so today’s market reaction would suggest there is still a sense of optimism that the global economy can recover from the pandemic. Brent crude traded 0.1% higher at $41.48 and high-grade copper advanced 0.6% to $3.05.

“On the currency markets, the pound fell 0.4% against the US dollar to $1.2766 and it was also weak against the euro. An apparent U-turn from the Government on where people should work, back in favour of staying at home where possible, stirred concerns among investors that the UK’s chances of economic recovery could be derailed, at least temporarily.”

TUI

“Anyone leading a business in the travel sector needs to be an optimist to motivate staff and encourage customers that they should still book holidays. That’s certainly the case with TUI which is remarkably upbeat given the circumstances. It talks about people enjoying their holidays and the company being in a strong position to prosper once travel volumes start to recover.

“Despite this optimism, TUI has seen a decline in booking volumes, holiday prices, holiday capacity and a shift in consumer trends whereby many people are waiting until the last minute to book which clouds earnings visibility.

“The fact that governments keep changing travel advice is not helping matters, but the pandemic is a fluid situation and companies like TUI will simply need to keep on their toes and be ready to either seize opportunities to sell more holidays if conditions permit, or hunker down and go into survival mode if conditions worsen.

“Summer 2021 bookings are a mixture of pent-up demand to get some sun and people shifting their 2020 bookings back a year. If the UK were to experience another national lockdown then TUI could feasibly see a dramatic reduction in summer 2021 bookings but potentially a surge once lockdown conditions ease.

“There is pressure on cash management in the business with TUI having to balance outgoings such as running costs and customer refunds with money coming in from new bookings. The current rise in coronavirus cases in the UK and many parts of Europe would suggest net cash outflow is going to increase.

“The sun was shining on TUI and its travel peers in recent months as lockdown conditions eased, but now the clouds are gathering, and its party looks like it will be rained off.”

Kingfisher

“Lockdown has arguably been a saviour to Kingfisher as it has provided the sales catalyst it has long needed to get the business back on track after struggling for years.

“The expectation of a return to tighter lockdown conditions could now be the catalyst to sustain the positive sales momentum.

“People stuck at home have paid more attention to the state of their property, leading to a surge in DIY activity both inside and out. With the colder weather now approaching, people won’t be distracted by enjoying their gardens and so there could be an even greater focus on making sure rooms inside the house are looking nice.

“In the background, Kingfisher needs to make sure it can deliver on this opportunity with improvements to the supply chain and stock availability.

“Customers will remember companies that were able to provide what they needed during the pandemic and that could drive brand loyalty. Kingfisher just needs to avoid any mistakes and this really is a once in a lifetime opportunity to accelerate its recovery plan and reshape the business while there is strong demand from customers.”

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