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Carnival - $2.0bn loss in Q3

Sophie Lund-Yates, Equity Analyst | 27 September 2021 | A A A
Carnival - $2.0bn loss in Q3

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Carnival plc Ordinary USD1.66

Sell: 1,385.00 | Buy: 1,388.00 | Change -75.60 (-5.18%)
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Carnival made an underlying net loss of $2.0bn in the third quarter. That reflects ongoing disruption due to coronavirus, with fewer voyages and reduced capacity.

Despite the reduced itinerary options revenue per passenger cruise days was ahead of pre-pandemic levels, as passengers increased onboard spending.

The shares rose 4.2% following the announcement.

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Our view

Cruise ships come with very high fixed costs. Costs that have to be paid whether they leave the port or not.

That's brought Carnival to its knees over the last 18 months. Even now, after a huge round of cost cuts, the group's burning through over $500m every month. As you can imagine, that leaves a large mark on the balance sheet.

Since March 2020 the group's raised more than $26bn to keep its business afloat, taking on new loans, selling off less-efficient ships and issuing new shares. 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, although we note the group's efforts to refinance means some of its debt is on more favourable terms.

Getting the balance sheet under control is going to be the main priority and will hold the business back for years to come. Recent forward booking trends are encouraging, but profits are not going to come rushing in just yet.

Even as Carnival returns to the seas, it's operating below capacity, and this will continue for some time. 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.

Carnival's future depends on how quickly the travel industry rebounds, and the group'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 (for example 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.

The now leaner organisation leaves room for more profit potential when demand does return. However, given the uncertainty ahead and the group's difficult financial position, investors should proceed with caution.

Carnival key facts

  • Price/Book ratio: 1.97
  • 10 year average Price/Book ratio: 1.34
  • Prospective dividend yield (next 12 months): 0.0%

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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Third quarter results

The group operated at 17% of total fleet capacity, as measured by available lower berth days. This is expected to increase to 47% in the current quarter. There has been strong demand for future bookings, with the booked position for the second half of 2022 at an all-time high.

The monthly average cash burn rate was $510m, better than previous guidance and in line with the first half of the year.

The group ended the quarter with liquidity of $7.8bn. Carnival raised $2.4bn of new bonds, most of which was used to pay existing higher rate debt. Together with other debt management efforts that has reduced annual interest payments by over $250m a year, while the group has also pushed back principal repayments of around $4bn.

Carnival said ''the gradual resumption of the company's guest cruise operations continues to have a material impact on all aspects of its business, including the company's liquidity, financial position and results of operations''. The group expects to make a net loss in the final quarter of the 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.