UBS ups TUI to 'neutral' after Thomas Cook collapse

UBS upped its stance on shares of travel company TUI to 'neutral' from 'sell' on Tuesday, as it said the demise of Thomas Cook "brings relief to overcapacity".

The bank, which hiked its price target on the stock to 900p from 740p, said the upgrade reflects its expectations of an improvement in short-term profitability and free cash flow following the collapse of industry rival Thomas Cook.

UBS raised its earnings per share estimates by 7%/23% in FY19/20. "However, after the circa 7% price increase yesterday we think the share price seems to reflect a good part of these positive effects," it said.

"Furthermore, we are less convinced about the mid-term benefits of the market consolidation. We expect in the context of low entry barriers incremental capacity to come to the market over the next 12-24 months."

As a result, the bank assumes the recovery in profitability will be short-lived before pressure on tour operator margins re-emerges.

TUI reiterated its forecast of a fall in full year profits earlier in the day and warned Brexit worries, Boeing 737 Max groundings and airline overcapacity would continue to pose challenges in the new fiscal year.

At 1400 BST, the shares were up 7.1% at 964.95p.