The retiring chief executive of Carnival made a telling distinction when presenting the cruise operator’s latest update on Friday. “While not recession-proof,” Arnold Donald said, “our business has proven to be recession-resilient.” However, like the difference between waterproof and water-resistant watches, this raises questions about how resilient it might be and how long it will take to shake out a recession’s pernicious effects. Not that the company is admitting a recession is actually going to happen, merely that it threatens.
At a time when global air travel is only for the long-suffering, cruises should be an ideal opportunity to satisfy the evident thirst for travel. And none better than Carnival, which claims to be the world’s largest leisure travel company. It runs 92 Princess, P&O Cruises and Cunard ships, containing 223,000 passenger capacity and calling at more than 700 ports. It has nothing to do with the Dubai-owned P&O Ferries.
“People are getting more comfortable living with this virus,” Donald said. “They are anxious to travel. We are well positioned because people still take vacations, and we are a much better value than a land-based vacation.”
Yet holidaymakers and investors are still wary. The shares have a habit of flipping up in the wake of results announcements, as they have since Friday, only to resume their downward path afterwards. Never mind the heights of £53 they reached in 2017; they have not come near the £37 at which they were trading in January 2020, before Covid. While the shares of most consumer-facing companies achieved at least a half-hearted V-shaped recovery that year, Carnival’s have chugged along between 614p and £18. They closed yesterday at 761½p.
That puts in perspective last Friday’s bulletin, for the quarter that ended on May 31. It started, as usual, relentlessly bullish in tone: “We are aggressively, yet thoughtfully, ramping up to full operations with over 90 per cent of the fleet now in service.” But dig down and Carnival admits that Covid and its effects are having “a material impact on the company’s business”, both in terms of bookings and staffing.
In the three months to May, the second quarter of its year, it suffered a net loss of $1.8 billion, compared with a $2 billion loss this time last year. For the first six months, the loss shrank from $4 billion to $3.7 billion. That turns into a diluted loss per share of $3.27 for the half-year, down from $3.63 a year ago.
Revenue of $2.4 billion was nearly 50 per cent up on a year ago. Occupancy was 69 per cent for the March-to-May period, compared with 54 per cent for December-to-February. That is a vital number, because of Carnival’s high fixed costs in the shape of its fleet. Bookings for the rest of the year are below average, despite discounts. It expects a net loss for the third quarter and for the full year. This is a step back from the first-quarter announcement in March.
There is a stack of “sell” and “underweight” recommendations from American analysts. Refinitiv notes that Carnival’s gross margin has been below the industry average for five years. Debt has tripled to $35 billion since December 2019, as it struggled to service a fleet that has been idle for much of that time. And now interest rates are rising.
“We remain concerned about high leverage and refinancing needs, high industry supply growth dampening pricing power, and the macro outlook,” Morgan Stanley said.
Resilient to recession Carnival may be, but when inflation and interest rates are rising, supply chains are erratic and the world is having to become accustomed to a possibly lengthy war, that resilience is limited. Cruises, and shares in them, are eminently postponable purchases.
ADVICE Avoid
WHY It looks increasingly as if 2022 is going to be a year to get through, and it will be worth waiting to see if things look better for next year
888 Holdings
More than one in four people gamble regularly in Britain, a far higher proportion than smoke. That is a blessing and a curse for bookmakers: it gives them a lucrative target audience; but it is also large enough to cause concern about possible social damage.
Anti-gambling campaigns have dragged on the share prices of Britain’s betting companies and although that pressure eased last year when it appeared that all of them were going to be bought by American rivals, calculations swiftly changed again when DraftKings pulled out of buying Entain and 888 Holdings turned buyer — from Caesars Entertainment — for the non-United States operations of William Hill for £2.2 billion, half paid from debt. Shares in 888 have since sunk from 478p to 160p last week.
More broadly, the sector is hamstrung by delays in the white paper reviewing the 2005 Gambling Act. Betting pressure groups have grown agitated at rumours that the government will dilute reform proposals, possibly including an industry levy to fund research into problem gamblers. Similar moves in the Netherlands have forced 888 to suspend activities there.
Against this background, last week’s trading update was received cautiously. For the year to the end of February, the existing 888 had £690 million of revenue, overshadowed by another £1.3 billion from William Hill. Combined revenue for the pair is expected to be £950 million to £965 million for the six months to the end of June. They will be formally united this Friday. That, 888 argues, will transform the group into “a global online betting and gaming leader”.
It also will give shareholders a heavily geared play that promises to maximise the upside. The £1 billion debt will cost up to 8 per cent interest a year, but will give shareholders the profits beyond that. Roberta Caccia, at Investec, predicts that will take earnings per share from last year’s 27.1p to 65p in 2024. The ratio of price to earnings correspondingly will shrink from 20.1 to 5.
ADVICE Buy
WHY The stock market is overdoing the gloom
