UK Edition
Carnival’s full-year results last week showed just how different the world feels compared to when this column first analysed the cruise ship operator in July 2019.
A second consecutive plunge in revenues and a multibillion-dollar loss are hardly a surprise but the last two years leave the balance sheet looking very stretched, so stretched the valuation is less attractive and the risks are higher now that they were in 2019.
As such it is time to admit that a chunk of the money sunk into the shares at nearly £36 a pop is gone and move on.
This may seem perverse at a time when travel restrictions are easing, the prospects for improved bookings for the key summer season are improving and this column continues to look for ways of playing an economic upturn as the pandemic (hopefully) becomes endemic and the threat begins to recede.
But Carnival’s balance sheet could constrain its ability to fully cash in and the benefits that flow through to shareholders.
At the time of the full-year 2019 results in December of that year, Carnival had $518m (£385m) in cash and $11.5bn in borrowings for a net debt position of $11bn. Shareholders’ funds (or equity) of $25.4bn meant that the gearing ratio was just 43pc and $3.3bn of operating profit covered net interest payments by a more-than-comfortable 18 times.
After two years of strife, the 2021 full-year results show $9.1bn of cash at hand but borrowings of $33.2bn and leases of $1.3bn to give a net debt position of $25.5bn. Heavy losses have eaten into shareholders’ funds and reduced them to $12.1bn, so the gearing ratio is 210pc. And even if operating profit returns quickly to 2019’s $3.3bn level, that would only just cover the $1.6bn interest bill by a factor of two.
None of those 2021 figures provide much comfort should anything else unexpectedly go wrong. That is a concern, since the first principle of investment is to protect your downside before you start thinking of upside. And the potential for upside may be capped by the valuation.
Again, this may seem strange when the shares are down by more than 60pc since summer 2019. But an analysis of the stock’s enterprise value, which adjusts the market cap for cash, debt, leases and pensions to give the full cost of ownership, gives a different picture.
In 2019, Carnival had 692m shares in issue and the share price was $50.21 when the results were released that December, for a market cap of $34.7bn. Add on the net debt position of $11bn and the company had an enterprise value of $45.7bn. Now, after a capital raising to see the firm through the pandemic, Carnival has 1.13bn shares in issue and at $19.11 a share that gives a market cap of $21.5bn.
That is a drop of $13.2bn from two years ago. But with net debt soaring to $25.5bn, the enterprise value is now $47bn, so the valuation is higher than it was two years ago, even if the company’s finances have weakened and the outlook for the cruise industry potentially changed.
Perhaps holidaymakers will flock back to cruise ships as and when Covid fades into the memory and becomes endemic. But the enterprise value calculation means a lot of that upside in sales and profits is baked into the price, even if improved earnings and cash flow will eat into the debt and reduce the enterprise value going forward.
There remains the danger that consumers prove initially reticent to share a big boat with hundreds or thousands of other passengers. Granted, Carnival has more than $9bn in cash and additional borrowing capacity to see it through and the firm is expected to lose only $1bn in 2022 compared to $8bn in 2021. But any delay to the profit recovery could drain that cash and leave Carnival tapping shareholders once more, especially as its 30-year depreciation rate for its ships could be said to flatter stated profits.
We got this one wrong. Time to sail away.
Questor says: sell
Ticker: CCL
Share price at close: £13.26
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.