Can Carnival Sail Safely through the Hurricane?
The post was originally published here.
What’s interesting about Carnival is that its debt has swollen by 200% compared to pre-pandemic level
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The world’s largest cruise operator with 91 ships
External events caused Carnival to struggle
- Carnival continues to face a tough recovery
- Due to the pandemic it had to stop its operations, while costs remained high
- On top of that, people might continue to avoid large crowds during holidays
- The outbreak of the Russian war led to additional cost pressures
- Fuel price have surged massively, which should result in further net losses during 2Q22 and onwards
The business is very capital intensive
- In the past, CAPEX-to-depreciation ratio has averaged around 150%
- Both maintaining its current fleet and building larger ships require a massive amount of funding
- In 2020 and 2021, the company faced net losses
- Hence, currently there is no way to fund its CAPEX internally
- The company was forced to take on a huge amount of debt to keep its operations alive
Accumulation of debt could be a burden for the future
- Carnival’s net debt has swollen to over 2.7x, which we consider very high leverage
- Given the CAPEX requirements, there is not much of the operating cash flow left to repay its debt quickly
- Plus, its lenders require a higher interest rate on the debt, increasing the interest burden for the company
Accumulation of debt could be a burden for the future
- Recent issued debt comes at a high cost
- Some contracts require the company to pay more than 10% interest rate
- Higher interest burden to drag on the net margin in the future
Accumulation of debt could be a burden for the future
- To measure the ability to repay its debt, we can calculate the net cash flow, which is the remainder of the operating cash flow after deducting all investing outflows
- In the 8 years prior the pre-pandemic, Carnival generated in total US$11bn in net cash flow
- This is just half of the additional US$20bn in long-term debt
- Hence, it will probably take the company very long time to repay its debt
Cost pressures require restructuring of its fleet
- During the pandemic, Carnival has sold around 10% of its fleet size in its attempt to get rid off inefficient ships
- The future focus will be on the construction on larger and more efficient ships to keep costs low
Rumors to sell one of its brands showcases how much it struggles
- Recent news published the rumor that Carnival considers the sale of its luxury brand Seabourn to the Saudi Sovereign Wealth fund, which holds a 5% stake in the company
- High CAPEX requirements and the pressure to serve its debt might require the company to reduce its fleet further
- It could be a desperate attempt to raise further capital to survive
Carnival needs its passengers to return urgently
- The main driver of its revenue constitutes the number of passengers
- The average revenue it generates per passenger has remained more and less flat
- While the company records increased bookings, it is still far away from returning to full occupancy
How does consensus access Carnival?
- Most analysts stay cautious and have issued a HOLD
- Over the past 4 months, analysts consistently decreased their target price
- Still, the median target price still sees a 120% upside compared to the current share price
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