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Carnival - losses continue, as bookings rise

William Ryder, Equity Analyst | 25 June 2021 | A A A
Carnival - losses continue, as bookings rise

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Carnival plc Ordinary USD1.66

Sell: 1,376.60 | Buy: 1,379.20 | Change -13.60 (-0.97%)
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Carnival's underlying losses deepened to $4bn in the first half, compared to a $2.2bn loss in the same period last year. This was primarily because the first two months of 2020 were pre-Covid. The group lost $2.1bn between March and May, compared to last year's $2.4bn loss.

Booking volumes in the second quarter were up 45% from last quarter, and cumulative advanced bookings for 2022 are ahead of 2019 levels despite minimal advertising spend.

The group has so far announced 35% of its capacity will be sailing by the end of the third quarter. That figure rises beyond 50% by the full year. The full fleet of ships is expected to be fully operational by Spring 2022. Management is expecting to report a net loss at both the third quarter and full year.

The shares were down 2.5% 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 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, investors should proceed with caution.

Carnival key facts

  • Price/Book ratio: 1.61
  • 10 year average Price/Book ratio: 1.3
  • 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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Second Quarter Trading Update

Monthly average cash burn came in ahead of expectations at $500m, due to the timing of ship sales and changes in working capital. It's expected to increase over the next few quarters as the group brings some of its fleet back into operation.

During the quarter customer deposits exceeded the impact of refunds and the group finished the quarter with $2.5bn worth of customer bookings.

The group refinanced its loan obligations during the quarter, taking future annual interest rate expense down by over $120m per year and spread $1bn worth of repayments coming due over a five year period.

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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.