TUI-Finanzvorstand: Wir sind auf dem Weg in den MDAX

Economy with Weissbach, your weekly podcast on economics and politics. Welcome and glad you're joining us for the new episode of Economy with Weissbach. We are completely independent and ad-free. If you like, send us your feedback and topic suggestions. You can reach me and my team at [email protected] or the classic way via LinkedIn. This podcast is not investment advice but is solely for information and entertainment. The hosts and guests assume no liability for investment decisions made based on the information heard in the podcast. These are today's topics: The interview of the week, TUI CFO Matthias Kiep speaks with me about the upcoming travel season, prices, and the question of why TUI left the London Stock Exchange. Then we look at the DAX: why should one not buy Bayer, why might SAP be quite attractive, and what is the Allianz stock doing? I discuss all this with Tom Ackermann from Fidelity. Finally, Infineon in focus after the good numbers from Taiwanese chipmaker TSMC. Our interview today: Europe's largest travel group TUI has given up its listing on the London Stock Exchange, thus completed a Brexit, and is fully back on the Frankfurt Stock Exchange. Why is this even news? TUI's shares are benefiting from this, and this could continue even longer because on June 24, TUI will also become a member of the MDAX and thus automatically included in the portfolios of fund managers who replicate the index. So it could continue to rise. Aside from these rather financial-technical reasons, TUI's revenues are likely to be good because demand for travel remains high despite high prices. I spoke with Matthias Kiep, the CFO of TUI. Let's listen in to the conversation.

We want to talk about TUI and of course the listing in Germany. What motivated you as a company to return to the German market?

What do you also hope for the stock price from the changed listing or the return to Germany?

Perhaps let's look at the year: the travel season, how does it look?

When you say you are confident for this year, where does the demand for travel come from especially, and where do people want to travel to?

You were able to increase prices very strongly in the last travel season. How does it look this year, and can that go on forever? When is the point reached where you say okay, now people would no longer book as much?

Are there also obstacles in terms of the development of travel activity? Perhaps capacity bottlenecks or the shortage of skilled workers?

Let's try to look at the medium term, how do you expect the prospects for the travel business and especially for TUI beyond 2024?

When looking at travel trends, it might be very interesting to hear from you. You feel the pulse, so to speak. Is the young generation different from the middle-aged generation and older travelers? Do they need something different, the so-called Generation Z?

Having traveled during the Easter holidays, he experienced it himself: the planes are full despite high prices, and this trend seems unstoppable. The catch-up effect from Corona continues, and the desire to travel is unabated, especially long-haul trips are picking up again. Looking at the markets: the DAX has gained more than 20% since the end of November last year. The big question is, of course, how it continues and whether the market still has potential to rise. And we look at selected stocks: Bayer, SAP, and Allianz. Let's listen in to the conversation with Tom Ackermann, he is a fund manager at Fidelity in Kronberg.

We want to talk mainly about the German market today, and of course also about the DAX, which has run a lot. What is the outlook in your opinion? Is there still potential?

Yes, so the DAX has clearly done quite well. First of all, it's very important to note that the DAX is not a reflection of the German economy. The large companies in the DAX, like SAP, Siemens, and Airbus, are of course almost all active globally, and the global economy is doing reasonably okay at the moment. It's also important to look closely at the numbers. Clearly, we have highs in the DAX. Since the end of 2021, the DAX is up 14% including dividends, which sounds very good nominally. But how much actually remains when we look at it in real terms? The total inflation since the end of 2021 is actually also 14.5%. That means nominally it looks good, but in real terms we haven't really done much. Nevertheless, it also shows how important stock investments are, because if I had left my money in a savings account, I would now be at -10% real. The big art is of course to leave out the bad stocks, because they can massively damage the portfolio.

I naturally also asked Mr. Ackermann this question. When we first look back, we see that there were certain companies that had big problems. A good example is Bayer. At the beginning of 2023, there was hope that there might be a split under the new CEO. By now, we all know that it won't work, and the problems at Bayer have actually grown bigger. And that is an example of a company that we don't have in our portfolio.

Let's look at Bayer again, because some people say that the price has fallen so much that it can't go down any further, and one should buy it. Why do you say the stock is still uninteresting?

Exactly. So you have to go back briefly to the Monsanto acquisition back then. In 2016 it all started, in 2018 the acquisition actually took place, and ultimately you have to say that was a massive wrong decision. Bayer was once the largest company in the DAX, they were at X% of the index. Now we are only at 2% of Bayer. So you should keep your hands off, because the risks are hard to assess. Not only the burden from the controversial weedkiller Glyphosate weighs on Bayer. Last year, weakness in the pharmaceuticals business was added. Then this year, one realized that some important things are happening. New drugs in the pharma area, for example, Ascexian, the project unfortunately failed. That means the pharma division suddenly has a problem because they cannot replace the drugs that lose exclusivity over the next few years with the new drug Ascexian. So profits in the pharma division will decline. The big question is, where does Bayer stand now? Point 1: the dividend has been cut to 11 cents for the next 3 years. Point 2: large cost reductions announced, 'Personnel Dynamic Shared Ownership' – that sounds good at first, but we'll see how it can be implemented. It comes with large costs, takes time, and it's not easy to get everything right. Point 3: I believe the litigation strategy, both for Glyphosate and for PCBs, has changed and is perhaps being played more aggressively. Then as an investor, you have to ask yourself: what are the scenarios here? What can happen? Clearly, it could be that some things happen that make the whole thing better. If a few of the small things go better and the direction is good, that could help the stock. But it's also not difficult to think of scenarios where it looks worse, because the debt is still very high, the room for maneuver is not large. So once again, the consequence: better keep your hands off Bayer.

Let's look at a stock market darling, that is SAP, the highest valued stock in the DAX. How does it look exactly here?

The stock has of course done very well. I think over one year we are now up 48%. That can be well explained. The entire cloud transformation and thus the transition from the license model to the subscription model is now progressing, which increases confidence in SAP's future earnings development. Moreover, artificial intelligence, the AI topic, is of course very relevant for SAP. When we look at that, we have to say, okay, what is reality and what is hope? An important question an investor always asks is: how important is the product that the company offers, and will the product become more valuable in the future, or on the other hand, are there cheaper or better alternatives from other companies? With SAP, it is very clear that the software is extremely relevant for customers. Data is becoming more important overall. Questions like: how do I manage my supply chain? How can I produce more sustainably? And so on. There are many, many other examples. Clearly, SAP's solutions are not perfect; the migration to the cloud is a very complicated process for many companies. And you also have to say SAP still has a lot of what you call in English 'technological debt'. So there is still work to be done. But what you can also see is that customers don't really have great alternatives. They are more or less forced to go along with the journey. Therefore, the probability is very high that SAP can achieve the promised growth targets.

There is also a lot of hope right now regarding the whole topic of AI and AI-based software solutions. Do you think there is a bit too much hope in it, and the market is getting ahead of itself, as one would say in English, or what do you think?

Yes, exactly. So that is of course the big risk. The topic is naturally very popular in the whole market at the moment. You also see it with all the semiconductor companies. For SAP, the topic is ultimately very relevant. They are sitting on a treasure trove of data. The question now is, can SAP manage to develop the software further so that it can really help companies create added value? The goal is always: how do I make the business model of a company more efficient? That is not easy. It takes time to develop good solutions, and different factors play an important role. For example, how does the partnership with Microsoft develop? That is a very important question. How many customers have already organized their data so that they can actually use the AI solutions? And does SAP itself have enough know-how? So, there is a lot of hope, the use case is real, as we say nicely in English, but we are still a bit cautious about the implementation. And we see that more over a time span of 3 to 5 years rather than already next year that it contributes a lot.

Allianz is basically the opposite of SAP, so-called Old Economy, and a bit boring, typical insurer. But that can also be an advantage, Mr. Ackermann finds.

That's interesting because with insurers you always think 'uh, boring', but there too you can say 'boring can be beautiful'. Yes, boring can be very nice. And the contrast with SAP is actually interesting. Looking over the last 10 years, SAP and Allianz have actually delivered exactly the same return. Yes, about 13% per year including dividends, so both have outperformed the DAX by 65%. That's interesting at first. The structured Alpha scandal naturally put pressure on the stock in 2021-2022, ultimately costing 6 billion. And back then we asked ourselves again: okay, what are the possible scenarios? What is already priced in? What is the reputational damage? And so on. That was very interesting. When you look at Allianz, you say: okay, over the last 10 years, the stock has traded at a P/E ratio of around 10. In 2021 we were at under 9, and in 2022 even under 8. And those are exactly the interesting moments for us. So 20% cheaper than usual valuation, good earnings growth, still an attractive dividend, and a problem that we said back then can be solved. It's not nice, it will cost money, but the long-term consequences are manageable. So you do your analysis, make decisions, and then you just need patience. Now we have seen that step by step everything has normalized. The problem was solved, the operating business continued to run well, the dividend has now increased, and the company was able to handle the inflation impact well. That explains why the stock has done so well over the last year. Now we are already at a P/E ratio of, say, at the higher end, and now it's back to 'okay, what are the scenarios when we look ahead?' And then we are back to the old Allianz: moderate earnings growth, a good dividend, and depending on which scenario for the overall market you believe in, economically, it can either be good enough or perhaps currently a bit too little compared to some other stocks. As they say, the jury is out on Allianz. The dividend is certainly interesting and most likely stable.

The investment of the week: at the world's largest chipmaker, Taiwanese company TSMC, things are going very well, and that also has an impact on Infineon. For the Taiwanese, it is mainly the boom driven by AI applications, because this requires very powerful chips. Chips are not all the same; there are chips for the automotive industry, for consumer goods, and then for AI applications. For Infineon, it is the case that 50% of revenue depends on the automotive industry. In electric cars, many more semiconductors are needed than in conventional combustion engines. In addition, there is the general trend that cars can do much more, especially in terms of electronics, and that also requires semiconductors. This should actually be a growing market, but investors are worried that the slowdown in electric car sales could lead to lower demand for chips, and that has weighed on Infineon's stock. Since the beginning of the year, the stock is down about 10%, despite the boom triggered by artificial intelligence. And that is exactly where Infineon wants to grow. The Munich-based company wants to significantly expand its business with AI servers in the coming years. Servers for AI applications have other, more powerful chips that naturally cost significantly more. Infineon's CEO explained in February that in classic servers, power semiconductors, chips that regulate the power supply to the processors, are worth up to $80. In an AI server, that can be up to $800. That shows how big the jump in quality and performance, and thus also in price, is for such AI-capable chips. Infineon wants to grow significantly here. Currently, the company generates only a low three-digit million euro amount in revenue from semiconductors for data centers in this exact area, but in a few years, this revenue is supposed to be increased to around 1 billion euros. So it is a new growth area for Infineon. Given these prospects, analysts are also quite positive; the majority recommend buying the stock. And given the recent weakness of Infineon, many of them say it could now also go uphill again. Our outlook for the coming week: next week we will look at the German insurance industry and also the prospects of German insurance companies abroad, together with Jörg Asmussen, the President of the German Insurance Association. With that, I wish you all a nice weekend.