Carnival – a risky investment

2020-10-26T18:49:11+00:00 October 26th, 2020|Finance|

Carnival Corp’s disastrous third quarter performance showed that the cruise line industry is not going to return to normality soon, an analysts’ platform said.

Seeking Alpha said in an investment note that analysts continued to believe that Carnival is a very risky investment with no upside at this stage, sticking to the opinion that the company is uninvestable.

This is especially true after the company reported a 99.5% decline in revenues from June to August. With a monthly cash burn rate of around $530 mill predicted in the fourth quarter and more than $20 bill in debt, there is a risk that Carnival will not be able to meet its obligations and will be forced to declare bankruptcy.

As a result of CDC’s decision to extend its ‘no sail’ rule, Carnival cancelled some of its US cruises until the end of the year. Currently, only the company’s Italian and German cruise lines are operational.

From June to August, the company’s revenues declined by 99.5% year-on-year to only $31 mill, while its GAAP loss for the period was $2.86 bill, against a profit of $1.76 bill a year ago. In addition, the adjusted net loss was $1.7 bill, against the adjusted profit of $1.82 bill in 3Q20.

While the company ended the third quarter with $8.2 bill in liquidity, with the monthly cash burn rate, Carnival will have less than $7 bill in liquidity in under three months, the analysts said.
Carnival operates in a capital-intensive business and spends a large amount of cash every month on fleet maintenance. While, in normal times, the cash generated from operations could easily cover those expenses and help the company to make a profit, in the current environment those ships are a major burden.

According to the company, it spends $250 mill in a single month alone on fleet maintenance, SG&A, and interest expenses. With such a high cash burn rate, Carnival had no choice but to announce that 18 of its ships, which represent more than 10% of the overall fleet, will leave or have already left its fleet.

While this action will help Carnival to offset some losses, it will not help it to return to profitability or drive its top-line growth in the near future, as Wall street expects the company to make about 70% less in revenues this year, compared to 2019.

Another downside is Carnival’s total debt, which stands at $26.34 bill. By having an overleveraged balance sheet, the company received a junk credit rating with a negative outlook from the major agencies, and it will likely issue more convertible notes or offer more shares just to stay alive and avoid insolvency.

The same can be said for Carnival’s major rivals, Royal Caribbean (RCL) and Norwegian Cruise Line, both of which are stuck in a similar situation and are losing money on a daily basis, Seeking Alpha said.

The problem is that the cruise industry will continue to be strictly regulated worldwide until COVID-19 is fully contained. In addition, there’s a risk that a breach of safety protocols might occur, which will have negative affect on the company.

As the world is currently experiencing a spike in new active cases for COVID-19, it’s safe to say that the demand for cruises will continue to be weak and most international borders will continue to be closed.

Perhaps better news for Carnival was that US Federal Judge Patricia Seitz has changed her ruling regarding the company’s environmentally compliant certification needed to restart cruising out of the US.

She originally ordered that the company provides a certificate for each ship at least 60 days before re-entering service but last week, dropped the timescale to 30 days.

Judge Seitz said that the company must provide a certification signed by the CEO outlining the status of pollution prevention equipment, pollution prevention equipment spare parts, proper shipboard staffing, IT support and voyage planning and what was called ‘waste offload support’.