Investing.com -- S&P Global Ratings has upgraded TUI to ’BB-’ from ’B+’ due to the company’s continued improvements in operating performance. The outlook for TUI remains stable. In 2024, TUI exceeded base-case expectations by growing its revenue by 12.1% to €23.2 billion ($25.7 billion). The S&P Global Ratings-adjusted EBITDA also increased by 23.8% to €1.8 billion ($2 billion) compared to 2023.

The upgrade also follows TUI’s positive free operating cash flow (FOCF) generation after leases in 2024. S&P Global Ratings expects this trend to continue, with TUI generating slightly above €200 million ($221 million) per year. This is expected to strengthen liquidity and reduce the company’s reliance on its revolving credit facility (RCF) during the low winter season.

The stable outlook is based on the expectation that TUI will continue to execute its strategic initiatives and increase dividend payments from its joint ventures (JVs). This is expected to improve scale and result in sustainably higher S&P Global Ratings-adjusted EBITDA margins, approaching 9%, despite a challenging macroeconomic environment.

In fiscal 2024, which ended on September 30, 2024, TUI’s revenue increased by 12.1% to €23.2 billion, supported by a 6.8% growth in customer numbers to 20.3 million and higher selling prices. This resulted in a 23.8% year-over-year improvement in S&P Global Ratings-adjusted EBITDA to €1.8 billion.

S&P Global Ratings anticipates further earnings growth for TUI in 2025, driven by solid pricing and summer bookings, as well as meaningful dividends from its JVs. The agency forecasts TUI’s revenue will increase by 6.3% in fiscal 2025 to €24.6 billion.

Despite cost inflation, S&P Global Ratings believes TUI will benefit from its recent strategic initiatives, including dynamic packaging, flight- and hotel-only offerings, and cross-selling of ancillary services. The agency also expects dividends from JVs to exceed €150 million in fiscal 2025 and more than €200 million from 2026. All these factors are expected to improve S&P Global Ratings-adjusted EBITDA margins to 8.3% in 2025 and 8.7% in 2026, compared with 7.9% in 2024.

However, higher capital expenditure (capex) is expected to limit sizable cash flow generation in 2025 and beyond. Nevertheless, S&P Global Ratings forecasts FOCF after leases will remain positive but be modestly above €200 million per year.

S&P Global Ratings expects TUI’s leverage to decrease to 2.3x in 2025 and funds from operations (FFO) to debt to increase to 31.8% due to higher earnings and reduced S&P Global Ratings-adjusted debt. Furthermore, S&P Global Ratings believes TUI’s business position has strengthened in light of post-pandemic recovery and improved business flexibility.

Despite these positive developments, TUI’s credit profile is constrained by low cash conversion, seasonality, negative working capital, and sizable minority interest. The group’s low S&P Global Ratings-adjusted EBITDA margin and significant capex and lease payments lead to a low, albeit improving, cash conversion, which limits a significant build-up of available cash to support the group in an adverse economic scenario.

S&P Global Ratings expects TUI to address the July 2026 €1.7 billion RCF refinancing timely, following the cancellation of its KfW facility in January 2025. Despite €2.9 billion of cash on the balance sheet at fiscal year-end 2024 due to sizable working capital seasonality, TUI still relied on RCF drawings during the winter in fiscal 2025.

The stable outlook reflects S&P Global Ratings’ view that TUI will continue to execute on its strategic initiatives and that its sizable JVs will increase dividend payments, thereby resulting in sustainably higher S&P Global-Ratings-adjusted EBITDA margins approaching 9%, despite a challenging macroeconomic environment. Absent common dividends, S&P Global Ratings expects this to result in stronger credit metrics, with FFO to debt sustainably exceeding 30% and debt to EBITDA below 2.5x.

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