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.
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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. 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
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