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Carnival - revenue coming back, challenges remain

Carnival - revenue coming back, challenges remain

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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: 781.60 | Buy: 785.00 | Change -11.80 (-1.49%)
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On 24 June, Carnival reported second quarter revenue of $2.4bn, up nearly 50% compared to the previous quarter. The group posted an underlying net loss of $1.9bn, taking the total loss for the half year to $3.8bn.

Cash flow from operations turned positive in April and was positive for the second quarter.

The group warned ''inflation and higher fuel prices are collectively having a material impact on the company's business, including its results of operations, liquidity and financial position''. Guidance for a net loss at the full year remains, and occupancy is still expected to return to pre-pandemic levels in 2023.

As of 1 August, Josh Weinstein, currently COO, will assume the role of President and CEO.

View the latest Carnival share price and how to deal

Our view

Cruise ships come with very high fixed costs. Costs that must be paid whether they leave the port or not. That operating structure means the group took a hammering during lockdowns. And just when we thought profit was on the horizon, ongoing uncertainty and rising fuel costs means Carnival now expects to report a full year loss once more.

After a huge round of cost cuts, 74% of capacity in operation and revenue up nearly 50% quarter on quarter, Carnival's finally starting to see operating cash flow turn positive.

That's welcome news because net debt of c.$28bn is a concern. Refinancing efforts will help the situation, pushing back repayment dates and reducing interest expenses. But even so, that level of debt 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. Commentary on bookings has flip-flopped a little, we're back with positive news as second quarter volumes were the highest since before the pandemic. Consumers look to be snapping up near-term bookings, likely a product of the uncertainty that still lingers.

Even as Carnival returns to the seas, it's operating below capacity, and this will continue for some time. Even once passengers are safely onboard, floating around with thousands of people in close quarters requires a great deal of spend to ensure compliance with enhanced public health regulation. Higher oil prices provide added cost pressure, though it was pleasing to hear the group expects several other lingering costs to ease after this year.

Longer term reservations look promising for both demand and pricing. We'd been concerned that pricing would have to drop to attract customers back. It's welcome news that this hasn't been the case, considering last we heard operating margins were alarmingly negative.

We're also supportive of efforts to streamline operations. Smaller, less efficient ships are being cast aside and permanent cost savings are being uncovered.

Ultimately though, Carnival's future depends on how quickly the travel industry rebounds, and the group's competitive position when it does. Carnival'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 much 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 ships can be filled again. The crucial summer period will be key for assessing where demand is, and how well the group's positioned to act on it. Given the uncertainty ahead and the group's difficult financial position, investors should proceed with caution.

Carnival key facts

  • Forward price/book ratio: 1.23
  • Ten year average price/book ratio: 1.40
  • 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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Second Quarter Business Update

Occupancy increased from 54% in the first quarter to 69%, with over 90% of the fleet now in service. Available lower berth days (ALBD), a measure of capacity, rose 14 percentage points from the first quarter to 74% of total fleet capacity.

Booking volumes for future trips nearly doubled in the second quarter, from the first. These were the best quarterly booking volumes since the start of the pandemic. Total customer deposits rose $1.4bn to $5.1bn, from 28 February to 31 May. Cumulative advance bookings for the current year are below the historical range, but 2023 continues to trend ahead and at higher prices.

Carnival expects a 'significant' improvement in underlying cruise costs, excluding fuel, per ALBD over the second half of the year. That comes as the group sold 23 smaller, less efficient, ships and expects some of the ongoing costs relating to restarting services, supply chain disruptions and inflation to ease this year.

The group has access to $7.5 billion of liquidity, including cash, short-term investments and available credit.

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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.


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