Norwegian Cruise Line Holdings Ltd. (NCLH) NCLH’s voyages remain canceled in the U.S., the company’s most profitable market, until at least January 1, 2021. Until then, Norwegian expects a monthly cash burn of $175 million.
For 2021, management said that bookings were below usual levels for the first half of the year but within typical ranges for the second half. As such, we see a slow recovery in net yields in 2021.
On November 9, Norwegian reported an adjusted third-quarter loss of $2.35 per share, down from EPS of $2.23. The adjusted loss missed the consensus call for a loss of $2.24 per share and reflected sharply lower revenue and unfavorable operating leverage. On a GAAP basis, NCLH lost $2.50 per share, versus earnings of $2.09 per share in the prior-year period. Third-quarter revenue fell nearly 97% to $6.5 million, but topped the consensus estimate of $1.0 million. The drop reflected the complete suspension of cruises. Ticket sales fell to just under $4.7 million from $1.37 billion. Onboard and other revenue fell more than 99% to $1.9 million. Fuel costs were $48 million, down from $99 million as a result of voyage cancellations. Below the line, interest expense rose to $140 million from $60 million. The share count rose to 271 million from 215 million a year earlier. Other expenses totaled $23.7 million.
Due to COVID-19, NCLH’S monthly cash burn was, on average, $150 million per month in the third quarter. For the fourth quarter, NCLH expects a monthly cash burn of nearly $175 million due to the timing of interest expense.
EARNINGS & GROWTH ANALYSIS
Reduced demand as a result of COVID-19 and a further delay in the resumption of cruises will hurt NCLH earnings over the next two years, in our opinion.
While Norwegian Cruise Lines offers travelers an attractive value proposition, it must still compete with other types of vacations (i.e., flights and land-based trips) that many believe to be safer choices as a result of the pandemic. We thus believe that cruise operators will have to work hard to lure customers back, which could mean lower net yields. As for costs, we see higher expenditures for health and safety measures going forward. In addition, we believe that difficulties in deploying ships due to the pandemic could result in higher net cruise costs. Based on these factors, we are widening our 2020 loss estimate to $8.00 per share from $6.80 and our 2021 loss estimate to $5.00 per share from $2.15.
FINANCIAL STRENGTH & DIVIDEND
On May 5, NCLH raised $2.4 billion in capital and was subsequently able to raise $400 million from a private equity firm. We estimate a monthly cash burn of $170 million in 4Q20. As such, we believe that NCLH will have enough capital to continue to operate through 2021.
Long-term debt totaled approximately $10.5 billion, up from $6.0 billion.
The company does not pay a dividend and is unlikely to initiate one in the near term.
MANAGEMENT & RISKS
Frank Del Rio became the company’s CEO in January 2015 following the resignation of former CEO Kevin Sheehan. Mr. Del Rio had been president and CEO of Prestige Cruise Holdings, which NCLH acquired at the end of 2014.
Norw egian Cruise Lines faces substantial risks from the coronavirus pandemic, as well as from terrorism or the threat of terrorism. The company is also vulnerable to unexpected increases in fuel costs, currency headwinds, and general economic weakness.
As of October 2019, it operated a fleet of 27 ships with approximately 58,400 berths under the Norwegian Cruise Line, Oceania Cruises, and Regent Seven Seas brands.
NCLH is trading at 21.5-times our revised EPS estimate for 2022 (which we discount back two years), which we believe adequately reflects prospects for slower net yield growth and cancelled cruises due to the coronavirus. In addition, we believe that it will be difficult for the shares to move higher given uncertainty about the course of the pandemic and the potential risks to cruise passengers. Our long-term rating also remains HOLD.
On November 24, HOLD-rated NCLH closed at $22.55, up $1.66.