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Carnival - bookings pick up, losses mount

Sophie Lund-Yates, Equity Analyst | 7 April 2021 | A A A
Carnival - bookings pick up, losses mount

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Carnival plc Ordinary USD1.66

Sell: 1,491.40 | Buy: 1,492.60 | Change -31.60 (-2.07%)
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Carnival reported a $2bn underlying net loss for the first three months of 2021, compared to $150m profit at the same time last year. That reflects disruption caused by Covid-19 travel restrictions. However, losses have lessened slightly from the final quarter of 2020.

First quarter booking volumes are around 90% higher than the previous quarter, and advanced bookings for 2022 are ahead of pre-pandemic levels. CEO, Arnold Donald, said the improvements were due to "significant pent up demand."

The shares were up 7.3% following the announcement

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Our view

Let's start with the obvious. Carnival is in bad shape after a year of maintaining ships that never left the port. That's because cruise ships have incredibly high fixed costs - meaning they have to be paid whether they sail or not.

At this point, the company is burning through cash at a rate of $500m per month - and that's after a year-long effort to bring costs down to absolute minimums.

The group has taken all of the necessary steps to remain afloat over the past year - raising $23.6bn since March 2020. The group is also selling off it's less-efficient ships and issued $1bn worth of new shares in February. That should be enough to get the group through the year, but that's come at the expense of diluting existing shareholders and increasing debt - at last check Carnival's net debt position was over $17bn. That is much higher than we're comfortable with.

Getting that under control is going to be the main priority and will hold the business back for years to come. The group's varying brands will see a staggered restart through late spring and summer, so profits aren't going to come roaring back.

As Carnival returns to the seas, the waters will be rough, so to speak. A more hygiene-conscious public could mean the group has to operate below capacity for some time in to compete with land-based activities that allow for social distancing. Even so, floating around with thousands of people in close quarters will require a great deal of spend to ensure compliance with public health regulations. Not to mention that rising oil prices will add to the cost to cruise.

In the near-term, Carnival may have to rely on discounting to lure customers back onboard. That could stop margins rebounding as quickly as hoped. At the moment, operating margins are alarmingly negative. Analysts expect these to climb back to pre-pandemic levels by 2023.

A lot of that depends on how quickly the travel industry rebounds, and Carnival's competitive position when it does, and to its credit, Carnival currently holds a large share of the market. The leaner organisation will also offer a lower cost-base, leaving room for more profit potential when demand returns to pre-pandemic levels.

But even in a best-case scenario where cruising returns in, Carnival is up against strong near-term headwinds that will keep a lid on profits for the foreseeable future. Given the uncertainty ahead and the group's difficult financial position, we would advise caution.

Carnival key facts

  • Price/Book ratio: 1.5
  • 10 year average Price/Book ratio: 1.4
  • Prospective dividend yield (next 12 months): 0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Trading Update

Carnival lost $500m in cash burn per month, which was slightly better than the $600m previously guided. At the end of the quarter, the group had $11.5bn in cash and cash equivalents. Carnival raised $6bn by borrowing more money, and issuing new shares and bonds. Total fundraising since the pandemic started is $23.6bn.

Looking ahead, including the cost to restart operations, the group expects monthly cash burn for the first half to be roughly $550m per month.

The group's AIDA brand resumed operations in late March sailing in the Canary Islands, while the rest of its brands are expected to stagger their return to business throughout late spring and summer. Holland America and Princess Cruises will pivot to offer land-based vacation packages.

Total customer deposits were $2.2bn at the end of the quarter, the bulk of which are future cruise credits ($1.8bn). The remaining $0.7bn are for 2021 bookings. The advanced bookings for 2022, which are ahead of 2019, have improved despite minimal advertising and marketing efforts.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.