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Can Carnival Sail Safely through the Hurricane?



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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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