Carnival’s capital raise could trigger a wave of consolidation in the cruise ship sector as CCL stock price falls

To get through the pandemic, Carnival has sold and leased ships or taken on debt – Photo: Shutterstock

Carnival Cruise Line (CCL) announced plans last week to sell an additional $1bn (£829m) of shares to pay off debt accumulated during the Covid pandemic. This will be the second capital increase in recent months that the cruise line has initiated. The group’s share price fell the day after the announcement by 11%. So, is the party over for Carnival (CCL) and will this latest development spark a wave of consolidation in the cruise industry?

To weather the pandemic and lockdowns, Carnival (CCL) sold and leased ships or went into debt. The result is that now the balance sheet is stretched. AJ Bell analysts say the company’s valuation (based on enterprise value) isn’t much cheaper than it was before the pandemic, despite a 78% drop in the share price. the action – since December 2019 and an increase in the risks associated with the company.

Carnival Stock Price (CCL)

Unexpected decision

JThe new shares will be at the price of $9.95, and the public offering is expected to close on Monday, July 25, 2022.

“This capital raise is sure to cause concern (in fact, let’s call it panic) in the investment community,” Stifel analysts wrote in a note.

But the sale of Carnival shares could have bigger implications. Shares of Norwegian Cruise Line (NCLH) and Royal Caribbean Cruises (RCL) fell last week on fears they may also sell shares.

Carnival’s move was unexpected, analysts said, raising questions not only about its own operations but also placing uncertainty on the rest of the industry.

“When we saw the stock, we knew immediately that investors would panic and assume that any cruise-related name would likely be looking to raise equity at some point,” Stifel analysts said.

But to fully understand Carnival’s current position, it’s vitally important that we take a look at its 2019 results.

2019 and beyond

“At the time of the 2019 annual results in December of the same year, Carnival (CCL) had $518 million in cash and $11.5 billion in borrowings for net debt of $11 billion,” AJ Bell chief investment officer Russ Mold wrote in a note. Equity (or shareholders’ equity) of $25.4 billion meant the debt-to-equity ratio was only 43% and $3.3 billion in operating profit covered net interest payments. 18 times more than comfortable.”

“After two and a half years of disputes, the results for the second quarter of 2022, published in June, show $7.2 billion of available cash, but borrowings of $35.1 billion and leases of $1.2 billion. dollars to give this net debt of 29.2 dollars. bn,” Mold added.

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Mr Mold points out that heavy losses have eaten away at shareholders’ funds, so the combination of lower net assets and higher borrowings has in turn pushed the debt-to-equity ratio to 284%. And even if operating profit returns to 2019’s $3.3 billion level in 2023, as analysts currently expect, that would only cover the latest annual interest bill of $1.6 billion per year. factor of two.

Royal Caribbean Cruises (RCL) share price chart

too much debt

Sophie Laud-Yates, equity analyst at Hargraves Lansdown, said: “Companies raise money through public offerings for a number of reasons. In some cases, it is to fund growth plans. In others, it is about filling the void of operational gaps. Unfortunately, Carnival’s billion-dollar cap-in-hand campaign falls into the latter category.

Laud-Yates points out that whether or not a cruise ship leaves port, it has to pay high costs.

“The group took a hammer blow during the lockdowns. And just when we thought profit was on the horizon, continued uncertainty and rising fuel costs mean Carnival (CCL) now expects to once again report a loss for the full year,” added Laud-Yates.

After a huge slew of cost cuts, 74% capacity in operation and revenue up nearly 50% quarter-over-quarter, Carnival is finally starting to see its cash flow from operations turn positive. But despite this, the group’s debt level is far higher than analysts are comfortable with and any delay in the earnings recovery could lead to rough waters.

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