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Carnival - strong Q3 but no upgrade to full-year outlook

Carnival reported 59.2% revenue growth in the third quarter, reaching an all-time high of $6.9bn.

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Carnival reported 59.2% revenue growth in the third quarter, reaching an all-time high of $6.9bn. That was helped by occupancy levels of 109%, with strong growth seen in both ticket sales and onboard revenues.

Growth in cruise and tour operating expenses was much slower, at 16.0%, allowing underlying cash profit (EBITDA) to reach $2.2bn - some 7 times the level seen last year.

There was an underlying free cash inflow of $1.1bn, compared to an outflow of $883m last year. Net debt has fallen 6.8% since the year-end to $28.5bn.

Booking volumes were nearly 20.0% above pre-pandemic levels and the booked position for 2024 is further out than "ever seen and at strong prices."

Guidance for full-year underlying EBITDA has narrowed slightly to between $4.1bn and $4.2bn.

The shares fell 5.6% in mid-afternoon trading.

View the latest Carnival share price and how to deal

Our view

The recovery seen by the biggest cruise operator in the world is no doubt impressive. Passenger demand is booming, and high occupancy levels coupled with more efficient ships have helped to boost margins. That's just as well because despite record revenues in the third quarter, management hasn't been confident enough to upgrade the full-year profit outlook, which we think is at least in part due to the increase in oil price seen so far this year.

Things are looking good into 2024 and analysts expect the strong momentum to continue, with operating profits predicted to rise by around 72% to over $3bn, off revenue growth of just 12%. That level of expectation presents some risks.

Whilst inflation may be showing some signs of abating, the outlook for consumer spending, particularly in the US, is far from certain as people whittle their way through savings built up during lockdown. The strong booking position for 2024 means Carnival should continue to prosper in the near term. But things may get tougher further out. Carnival's also expanding its fleet faster than its rivals which is all well and good whilst bookings are solid, but could make it even harder to react to a slowdown.

The industry's also a big contributor to carbon emissions and other pollutants. Carnival's looking to innovation to mitigate this through both the increased usage of biofuel blends, and a series of technology upgrades which are designed to reduce both fuel usage and greenhouse gas emissions - while also contributing to cost savings.

But our biggest concern is the balance sheet which is still feeling the after-effects of the COVID-19 pandemic. At the last check, Carnival's net debt stood at $28.5bn. That's 65% higher than Carnival's total market value, meaning that for now, it's very much debt holders who influence Carnival's course. Although Carnival is hopeful of generating underlying free cash flow this year, it could be a long while before that balance is redressed in shareholders' favour.

Despite the recent strong performance, the equity valuation remains a long way below the long-term average. Carnival is well-placed to have a good year, but it needs to have a few in a row to make a dent in its debt pile. And with consumers under pressure from all angles, that could still be a big ask. Net debt is sitting at about 7x the mid-point of this year's underlying EBITDA guidance. That's very high. Until it returns towards a low single-digit figure, the risk of default on debt repayments remains higher than we would ideally like.

Carnival key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 29th September 2023