<p>Tour Operators<br/>INITIATION<br/>It's all about capacity<br/>The 2007 mergers have, we believe, created the conditions which should allow<br/>all three European tour operators to improve their ROIC. In the short term this<br/>means right-sizing their package businesses, in the longer term moving more<br/>into non-European, higher-growth, tour-inclusive outbound markets and, via<br/>dynamic packaging, into the total travel market.<br/>Current trading is strong, with capacity offered at a lower level than last year<br/>and bookings and prices holding up well. With the companies hedged against<br/>the recent sharp movements in both fuel and exchange rates and with TCG and<br/>TUI having 20% fewer holidays to sell than they did this time last year, we<br/>remain relatively confident of our underlying current year EBITA forecasts—as<br/>long as demand does not collapse. We do, however, remain concerned about<br/>exchange rate translation impact, which we believe will favour TUI and have a<br/>negative impact on TCG and Kuoni.<br/>For 2009E and 2010E we expect TCG’s and TUI’s synergy benefits to be<br/>partially offset by the recent fuel price increases, exchange rate movements and<br/>weaker consumer demand.<br/>We believe that Kuoni’s asset-light, high-return model deserves its current<br/>premium rating. We initiate coverage with a Neutral rating and a DCF-derived<br/>fair value of SFr 636 per share; we set our share price target at SFr 635.<br/>Furthermore, we argue that Kuoni ought to trade at a 10% EV/EBITDAR<br/>premium to TCG and TUI post synergy benefits and that TCG and TUI ought,<br/>given what we currently know, to trade on the same multiple. This suggests a<br/>2010E EV/EBITDAR rating of 5.0x for each stock and a fair share price of 315p<br/>for TCG and 280p for TUI. These are supported by our DCF analysis. We<br/>initiate coverage of TUI with an Outperform rating and a share price target of<br/>280p, and we alter our rating on TCG* from Neutral to Outperform and raise our<br/>share price target from 274p to 315p.</p><p>Table of contents<br/>Investment summary 3<br/>Valuation 5<br/>Global market overview 11<br/>The UK outbound market 13<br/>Future market trends 19<br/>A financial comparison 28<br/>Kuoni (KUNN.S) 31<br/>Thomas Cook Group plc (TCG.L) 50<br/>TUI Travel Plc (TT.L) 74</p><p></p><p>
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