In today's uncertain economic times, splashing out on cruise ship operator Carnival's (CCL) expensive holidays is hardly a big priority for most consumers. After all, the UK's economy is still flatlining, while the euro area, according to the IMF, is set to contract by 0.3 per cent in 2013. And while the IMF expects the US economy to grow by l.9 per cent this year - the US is a key market for Carnival - that doesn't seem to be boosting demand for cruises yet. Add that to a precariously high share price rating and Carnival's shareholders should jump ship.
- Returning capital to shareholders
- Robust market position
- Weak consumer backdrop
- Falling advance bookings
- Cost challenges
- Shares expensively rated compared with rivals
Last month's second-quarter trading statement was distinctly lacklustre. Cumulative advance bookings for the remainder of 2013 were reported as being behind last year's figure, and at prices that are below last year's. The weak bookings situation hasn't been helped by sentiment issues after the group's Carnival Triumph ship suffered an engine room fire in February - stranding passengers at sea for five days, without power or proper sanitation. Second-quarter net revenue yields (defined as the net revenues per available cruise days) fell by 1.9 per cent compared with the same period in 2012. For 2013, management expects net revenue yields to be 2-3 per cent lower than in 2012.
Costs, too, are a worry. Strip out fuel and Carnival's second-quarter net cruise costs (per available lower berth day) jumped 8.8 per cent. That reflected such factors as vessel repair costs, more dry dock days and higher insurance costs. True, fuel costs have fallen - second quarter fuel prices were $683 (£449) per metric tonne; down 9.7 per cent year on year. While fuel consumption fell 5.7 per cent. But fuel costs remain historically high. Fuel costs look set to rise following implementation of stricter sulphur emission limits. Analysts at broker Numis Securities think Carnival is facing "an increase in its annual fuel costs of $225-$275m from January 2015" because of this.
CARNIVAL (CCL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 2,289p | MARKET VALUE: | £18.3bn** | |
| TOUCH: | 2,288-2,290p | 12-MONTH HIGH: | 2,638p | LOW: 2,017p |
| FWD DIVIDEND YIELD: | 4.3%† | FWD PE RATIO: | 15 | |
| NET ASSET VALUE: | 2,883¢** | NET DEBT: | 45% | |
| Year to 30 Nov | Turnover ($bn) | Pre-tax profit ($bn)* | Earnings per share (¢)* | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 13.5 | 1.81 | 224 | nil |
| 2010 | 14.5 | 1.98 | 247 | 40.0 |
| 2011 | 15.8 | 1.91 | 242 | 100 |
| 2012 | 15.4 | 1.30 | 188 | 150† |
| 2013** | 15.6 | 1.21 | 156 | 150† |
| 2014** | 16.5 | 1.80 | 227 | 150† |
| % change | +6 | +48 | +46 | - |
Normal market size: 1,000 Matched bargain trading Beta: 0.996 †Includes 50¢ special dividend *Underlying EPS and PBT figures **Numis Securities Estimates £1=$1.52 | ||||
That combination of rising costs and weak consumer demand has been bad news for returns (see graph). Chairman and chief executive Micky Arison thinks that such measures as more fuel-efficient ships and an improved marketing effort will "drive improved return on invested capital over time". But, given the slender returns at present, that looks like a long-term project.
News that the long-serving Mr Arison's role will be split from 3 July - he'll remain chairman while the similarly long-serving Mr Arnold Donald will become chief executive - hasn't exactly inspired applause, either. "We find it disappointing to hear that there was no external search and it appears that [Mr] Donald has not had a hands-on CEO role for almost a decade," said Numis. So investors shouldn't expect Carnival's new first mate to steer a radical new course.
Still, there's no doubting Carnival's market clout - it's the world's largest cruise operator, with roughly a 45 per cent global market share. The group is also committed to returning its free cash to shareholders by repurchasing shares and, in 2012, through a 50¢ special dividend, too. But while Numis is currently forecasting a similar special payment for 2013, last month's weak trading update has now left the broker less confident of this - leaving that forecast unlikely to be maintained.
