City Insider: Tui may have reached ‘revulsion point’

City Insider - A City perspective on the travel industry from FT journalist David Stevenson

The travel giant’s £88m accounts hole has done disproportionate damage to its share price. Here’s what investors are thinking

The events of last week at Tui Travel are hugely symbolic. In and of itself the company’s restatement of prior results doesn’t amount to a seismic shock, but add to that the subsequent resignation of its respected finance director, the share price drop of 10% and the subsequent becalming of the shares and I think you have a much bigger story.

A non-cash revelation (or should we say re-evaluation) shouldn’t have knocked 10% off the share price. Whenever a large company goes through numerous mergers and acquisitions there’s nearly always a nasty aftershock, and I know of no major company in a similar position which has not in some way cocked up with accounting treatments or questionable revisions.

The restatement was worth a two to five percent hit, and should not have resulted in the shares going nowhere for the last week. Curious as to what is going on behind the scenes, I decided to ring around fund managers in London’s equity income space.

Equity income managers are the guys and gals who should be buying Tui’s shares – this is after all a quality company with decent finances and a well backed dividend. Having talked to a few (sadly off the record) I’ve come to the conclusion that this affair may be what investors call the ‘revulsion point’.

Revulsion describes a behavioural reaction where investors move beyond worry and cynicism to outright fear and contempt. In particular it describes an almost visceral fear amongst value investors of the unknown, and fear of surprise.

The last and best example I can think of is the days surrounding the collapse of Lehman’s, when investors found themselves repulsed at the thought of buying investment bank stocks. Panic set in and investors wanted to dump the stocks at all costs. And then a deadly calm ensued, where shares were in freefall but investors just weren’t interested in buying a quality peer like Goldmans or even HSBC.

Revulsion had set in with the banking sector, and no matter how good your fundamental story, investors would not believe anything.

I’m fascinated by the process of revulsion, because it usually represents the ideal opportunity to make a purchase. Good contrarians love a revulsion moment and they start moving back into the shares in a fairly aggressive way. It’s also the cue for M&A activity a few months later.

To a man, my equity income fund managers said that the news made them rather sad for Tui Travel, which they rated highly. But it also reminded them that travel companies really are immense black boxes where anything can and does go wrong – one minute it’s external phenomena, the next it’s internal accounting or a hedge.

Many outside observers naively assume that complexity is actually good news for investors. Surely they can let loose their analysts to ascertain the true value of the stock, after combing through the accounts and feeding the correct numbers into their valuation models?

In my experience the exact opposite is true. The City does boast a large number of analysts but most of them aren’t really interested in constructing complex models. In reality a good analyst is part salesperson, part market researcher. They love reading the trade newspapers, they look at market research, and the accounts are clearly relevant – but what analysts care about is the promise of growth and the reality of good value in the share price. Add these two up and you can build a convincing narrative as to why you’d buy the shares.

Complexity is a threat, and the Tui restatement was a reminder that no-one really knows what’s going on inside the travel black box, including the finance directors of the companies themselves. One of the funds I talked to had started selling the day after, and the others all said they’d look to sell on any price pick-up. They were all too scared and frightened to keep holding the stock.

And if you thought Thomas Cook had got away with a positive result after the Co-op merger, think again. Every manager and researcher said roughly the same thing: “Why don’t these guys stop restructuring, restating and merging and focus on building robust financial reporting systems and organic growth?”. Cue a telephone call to their stockbrokers.

One last contrarian thought. If I were Tui’s parent group I’d be looking for the share price to go below 180p to 200p before I’d make the long overdue move of mopping up the shares. Acquirers love a nasty bout of revulsion – they’re in it for the long game after all and aren’t fazed by black boxes.

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