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Carnival - share scheme revealed, losses mount

Nicholas Hyett, Equity Analyst | 29 June 2021 | A A A
Carnival - share scheme revealed, losses mount

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Carnival plc Ordinary USD1.66

Sell: 1,376.60 | Buy: 1,379.20 | Change -13.60 (-0.97%)
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Carnival reported a $3.1bn operating loss on revenue of $75m for the six months through May, reflecting losses across all segments. Monthly average cash burn came in below expectations at $500m, due primarily to ship sales and working capital changes.

The group plans to sell $500m worth of CCL shares on the US market, the proceeds of which it will use to buy its UK listed Carnival plc shares.

The group is currently operating at 35% of capacity. That's expected to rise to 50% by the end of the fourth quarter and 100% by spring 2022. The phased resumption of operations means the group is expecting a net loss for the third quarter as well as the full year ending November 30, 2021.

The shares were down 1.2% following the announcement.

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Our view

Carnival is in bad shape after a year maintaining ships that never left port - leaving the group with incredibly high fixed costs and next to no revenues. 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 down costs.

Since last March the group's raised more than $24bn to keep its business afloat, taking on new loans, selling off its less-efficient ships and issuing new shares in February and June. That should be enough to get the group through the year, but has come at the expense of diluting existing shareholders and increasing debt - at last check Carnival's net debt position was over $21bn, compared to $11bn in 2019. That is much higher than we're comfortable with.

Getting the balance sheet 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.

Even as Carnival returns to the seas, the waters will be rough. 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. Floating around with thousands of people in close quarters will require a great deal of spend to ensure compliance with public health regulation - 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 - although 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. To its credit, Carnival currently holds a large share of the market. The group's brands cater to specific populations (Carnival targets families and Seabourne luxury travellers), something competitors try to blend by straddling the two price points. And with ports located within 5 hours of most of the US population, Carnival has carved out a unique value proposition in its largest market. Plus, the now leaner organisation leaves room for more profit potential when demand returns to pre-pandemic levels. However, given the uncertainty ahead and the group's difficult financial position, investors should proceed with caution.

Carnival key facts

  • Price/Book ratio: 0.9
  • 10 year average Price/Book ratio: 1.06
  • 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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Half Year Results

Revenue in North America & Australia was down 99% with passenger ticket revenue and onboard revenue of $1m and $18m respectively. Despite an 83% decrease in operating costs, the segment reported a $1.8bn loss, compared to a $3.1bn operating loss in 2020.

In Europe & Asia passenger ticket revenues were down 98% to $22m while onboard spend declined 95% to $19m. That fed into an operating loss of $1.1bn, compared to a $1.7bn loss last year.

Working capital declined from $1.9bn to $1.4bn over the past six months as the group refunded customer deposits. As at May 31, the group include $2.0bn worth of customer deposits in its working capital and expects to continue paying refunds for cancelled cruises and crediting customers for future sailings. Management expects this to create a working capital deficit once the group returns to normal operations.

Net debt rose to $21.5bn from $17.4bn and the group's interest expense rose by $256m to $437m, reflecting higher-rate loans taken on over the past year.

The group recorded a free cash outflow of $4.7bn, up from $3.2bn last year.

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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.