Carnival reported 40.6% revenue growth in the fourth quarter, reaching an all-time high of $5.4bn. That was helped by occupancy levels of 101%, with strong growth seen in both ticket sales and onboard revenues.
This increase in revenue combined with prudent cost management saw underlying cash profit (EBITDA) reach $946mn against a loss of $96mn in the same period last year. This also helped underlying free cash flow improve from a $499mn outflow to a $240mn inflow.
Net debt has reduced by 7.7% to $28.2bn.
Carnival has entered the current financial year with two thirds of its cruise capacity already booked, with prices on bookings taken in the final quarter considerably higher than in 2023. In 2024 the company now expects underlying cash profit growth of over 30% to about $5.6bn.
In London, the shares finished up 5.3% on the day.
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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.
Things are looking good into 2024. The strong bookings position gives us confidence that 30% plus growth expectations for cash profits (EBITDA) are on the conservative side. There are however some factors out of management's control. Carnival's ships use a lot of fuel. A 10% increase in the fuel price is likely to reduce cash profits by about 3.4%. But that's not a huge sensitivity. It's also worth noting that the softening outlook for oil prices means this could actually boost earnings if prices move in the opposite direction.
The key question for investors is how long will strong demand last? Much will depend on policy makers' ability to guide the economy towards a soft landing on both sides of the Atlantic as inflation starts to ebb. And here there's still a lot of uncertainty. But the demographics of cruise passengers may provide some shelter from the storm should we see an economic slowdown. Pre-pandemic, some 66% of cruise passenger were aged 40 or over. And there are some signs that consumer spending is holding up better amongst older generations.
Longer-term Carnival is 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.
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 $28.2bn. That's higher than Carnival's total market value, meaning that for now, it's very much debt holders who influence Carnival's course. Although the outlook for cash generation is encouraging, 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 5x the mid-point of this year's EBITDA guidance. That's very high. Until it returns towards a low single-digit figure, there's unlikely to be a return of dividend payments to smooth investment returns. The recovery in the valuation seen over 2023 means there's pressure for management to deliver, which increases the risk of ups and downs.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
According to Sustainalytics the company's overall management of material ESG issues is strong, with a robust governance structure and reporting framework in place. However Carnival still faces significant exposure to risks linked to emissions, effluents and waste as well as quality and safety issues. Carnival has implemented carbon reduction programmes but shipping is likely to be one of the last forms of transport to be decarbonised.
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.
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