Ship management company

Carnival navigates thinning cash

The early days of the Covid-19 pandemic looked bad for many businesses. However, few were as much in the public eye Carnival (CCL).

Bullish points

  • The largest cruise operator in the world
  • Operating cash flow now positive
  • Reservations almost at pre-pandemic levels

bear dots

  • The cost of fuel is soaring
  • Closing of debt markets
  • Other possible capital increases

The cruise operator’s Diamond Princess ship has been featured in news reports around the world every night after infections spread through the ship, which Japanese authorities have quarantined at Yokohama port for three weeks. At one point, more than half of the confirmed cases worldwide outside of China were on board and 13 passengers died.

Elsewhere, Carnival cruise lines have struggled to get people back to dry land, with some countries denying access to ports over fears the ships are carrying infected passengers.

The Miami-based company, whose shares have been listed in the US and UK since it bought P&O Princess Cruise in 2003, had started 2020 on a wave of optimism. It predicted growth rates of 4.5% per year through 2025, but its share price fell 74% in the first quarter as the US Centers for Disease Control banned all crossings – a measure which it kept in place until July 2021. Most other countries have followed suit.

stay afloat

Carnival entered the pandemic as the world’s largest cruise operator, with 104 ships. In the year ending November 2019, it carried 45% of all cruise passengers on its nine lines – including Carnival, Holland America, Princess, Costa, Cunard and P&O.

Overheads were also high, with operating costs of $17.5bn (£14.81bn). Despite launching a series of staff furloughs, layoffs and pay cuts in May 2020 to reduce cash burn, the group still suffered cumulative pre-tax losses of almost $20 billion (17 billion pounds) over the past two years.

But beyond the collapse of its market, Carnival’s main problem was that it had committed colossal sums to finance new ships. Between the end of its November 2019 year and May this year, the company spent $8.4 billion on new vessels, as well as $2 billion on vessel upgrades and replacements, IT systems and other capital expenditures. .

It was only able to stay afloat by tapping into the capital markets for huge sums of money. In the 36 months to May, the company issued more than $30 billion in debt and raised $4 billion from equity investors. Another $740 million was recouped through ship sales.

Carnival suffered a net cash outflow of $1.9 billion in the six months to May, but with most of its fleet back on the water and booking demand increasing, management said that the worst was over.

Indeed, the phrase “inflection point” was used three times during an interim earnings call on June 24, as outgoing chief executive Arnold Donald noted that operating cash flow had become positive during the second quarter of the year.

At that time, sailing capacity was at 91% of pre-pandemic levels and occupancy rates were heading towards 80%. Booking volumes for future cruises had also increased: Second quarter bookings for all future sailings were at the highest level since the start of the pandemic, although they were still below pre-pandemic levels, a said Chief Financial Officer David Bernstein.

The company still posted a net loss of $3.7 billion in the first half, only marginally better than the $4 billion loss recorded a year earlier. Bernstein blamed extra spending to get ships back to sea, with higher inflation and the costs of adhering to stricter health and safety protocols, but estimated adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) would turn positive in the company’s current quarter, “which after all we’ve been through will be something worth celebrating.”

Even this low bar is not acquired given the weight of inflation. While a doubling in volumes accounted for most of the more than three-fold increase in fuel costs in the first half to $910 million, a 79% increase in average fuel prices did little to help.

Payroll costs also more than doubled to $1.04 billion and although the company said it was “making progress” in addressing staffing issues, Princess and P&O lines have had to cancel trips these months due to a lack of personnel.

Cost pressures mean analysts are far less confident about Carnival’s near-term prospects, especially as it opts not to buy fuel hedges, unlike its peers.

UBS cut its price target on Carnival shares from $23 to $12 last month, with rising fuel prices accounting for about $8 of its cut and rising interest rates another $2.

Meanwhile, Stifel lowered its 2022 Ebitda forecast from $103 million to a loss of $244 million and cut its target price by a third to $20, arguing that near-term weakness masks this. which its analysts consider an “incredible” long-term trade. Indeed, although stocks are down 48% year-to-date, their recent rally suggests the investment bank may be right when it suggests long-only investors buy ahead of a cash flow. overall cash balanced.


As Stifel notes, investors have two near-term concerns: the sustainability of current bookings amid a deteriorating consumer outlook, and debt. On the first point, the bank believes booking patterns are “mostly sound” and that tight labor markets and high savings rates mean any impending recession will be atypical. Last week, Carnival Cruise Line said its daily booking level had doubled after updating its policy to admit unvaccinated guests if they can show a negative PCR test.

How much demand persists if the state of the economy becomes more perilous is a key question, given Carnival’s reliance on North American and European markets. Together, these accounted for 85% of 2019 revenue and 98% of fiscal 2021 revenue, thanks to the continued closures of many Australasia ports. Two consecutive quarters of shrinking US gross domestic product and fears of winter energy shortages on both sides of the Atlantic have led some economists to predict deep recessions.

Morgan Stanley lowered its price target on the share to 575p at the end of June. Should the sector face further demand shocks, its analysts believe equity investors could be wiped out.

The main concern is liquidity. While the $7.5 billion available at the end of May may seem huge, the future commitments are also heavy. Investment commitments amount to $5.6 billion and $4.3 billion this year and next year, respectively, with interest payments alone amounting to $1.6 billion per year , and in May, $4.1 billion in debt was set to mature by the end of 2023. Some ship sales have helped, but the trade-off is a reduction in the long-term sales growth target to 2.5 percent.

Berenberg believes that even if the second half returns to profitability, Carnival will have spent $3.2 billion in cash this year and $5.5 billion by the end of 2023. That would be tantamount to withdrawing some of its facility $2.7 billion revolving credit facility, which is also due to expire in 2024.

“To get the balance sheet back on par, we estimate Carnival will need to secure an additional $3 billion in long-term funding,” the bank’s analysts wrote recently.

And while the average interest rate on Carnival’s debt is around 4.5%, the 10.5% coupon attached to May’s $1 billion debenture offering shows that debt investors draw red lines. S&P Global gave Carnival a debt issuer rating of “B” – below investment grade – with a negative outlook, while Morningstar analysts interpreted the surprise $1 billion increase from July as a sign that “acquiring additional debt right now is becoming prohibitively expensive.” .

Few expect the capital markets to completely abandon the company, but if the appetite for corporate debt wanes as interest rates rise ever higher, it will be the Equity investors that Carnival will turn to once again as they look for a way to weather the storm.

Company Details Last name Market Cap Price 52 weeks high/low
Carnival (CCL) £1.37 billion 773p 1797p/596p
Size/debt NAV per share* Net Cash / Debt(-)* Net debt / Ebitda Operating cash/EBITDA
738p -£23.2 billion
VEvaluation P/Sales Before PE (2023) FCF yield (+12 months) EV/Sales
1.3 11.6 -3.6% 7.2
Quality/ Growth EBIT margin 5-year ROE CAGR of sales over 5 years Asset tower
-103.8% -13.1% -35.0% 0.3
Forecast / Momentum Fwd EPS grth NTM Fwd EPS grth STM Mom of 3 months % change in EPS before over 3 months
-90% -26.6%
Year-end November 30 Sales (in billions of dollars) Profit before taxes (in billions of dollars) EPS (c) DPS(p)
2019 20.8 3.09 440 152
2020 5.6 -7.98 -747 31.9
2021 1.9 -8.40 -697 nil
f’cst 2022 13.3 -4.15 -356 nil
f’cst 2023 21.7 0.91 79 nil
load (%) +63
Source: FactSet, adjusted PTP and EPS figures converted to £
NTM = next 12 months
STM = Second 12 months (i.e. one year from now)
*Converted to £