The world’s largest cruise ship operator Carnival (LSE: CCL) published its half-year results on Friday afternoon. Given that all sailings have been suspended since mid-March, you’d expect grim news, but the Carnival share price climbed soon after the figures were released.
I’ve been taking a closer look. Although the numbers aren’t pretty, I can see some signs of hope. However, I think that anyone buying the shares today needs to understand the risks involved.
Cruises restart in August
The headline news is that Carnival is going to start cruising again in August. But this isn’t a return to normal.
Carnival will be testing the waters with three ships sailing from Germany under its AIDA brand. They will have reduced passenger capacity, strict safety and hygiene procedures and enhanced on-board medical facilities. Each trip will be three days and there will not be any port calls.
Looking further ahead, Carnival says that it’s seeing steady bookings for 2021. Capacity remaining for sale next year is said to be within historical ranges, albeit with prices down by “low-to-mid single-digits” percentages.
Customer loyalty
So far, only half the passengers whose cruises have been cancelled have asked for cash refunds. The rest have been happy to accept credits against future cruise bookings. This highlights a key attraction of this industry — cruise ship passengers are often repeat customers.
Personally, I’m not too worried about future demand, as long as Carnival can restart cruising without a repeat of the on-board Covid-19 outbreaks we saw in the early part of this year.
A health disaster would probably cause the Carnival share price to crash. But I think this is unlikely. As a shareholder, I’m far more worried about the financial risks in this situation.
$650m per month to do nothing
Monthly expenses have fallen from $1bn in the early stages of lockdown to around $650m today. But that’s still a lot of money when you can’t trade.
The group’s half-year accounts suggest to me that the company may just be able to get back to business without running out of cash. Since March, Carnival has raised about $10bn in new debt and equity. The group’s current cash balance is about $6.9bn, which should cover outgoings for the rest of the year.
Management has also managed to speed up several planned ship sales. Nine ships are expected to be sold in the next 90 days, in addition to four on which sales were agreed last year.
However, losses of $2.9bn are recorded relating to ship valuations. This suggests to me that these sales may be at bargain prices. It’s probably not a good time to be a forced seller of cruise ships.
Carnival share price: buy, sell or hold?
I think Carnival will adapt and survive. But it’s not yet clear whether the group will be able to return to profitable operation without needing refinancing.
If that happens, then I think the most likely outcome would be that some of the group’s $18bn debt mountain would be converted into new shares. Existing Carnival shareholders would probably face big losses in this scenario.
I think the situation is finely balanced. I’m going to continue holding, but I would say that this is only a buy for investors with a fair level of risk-tolerance.