Bigger, higher, wider - that's the motto in the cruise industry. The eagerly awaited premiere of the world's largest cruise ship, the "Icon of the Seas" from Royal Caribbean, fits in with this. It will have room for 5,610 passengers and is scheduled to set sail in January 2024. Only slightly smaller is the "Carnival Jubilee", which has just been launched. The cruiser, which is around 345 meters long, can accommodate around 5,400 guests. The ocean liner of the US shipping company Carnival Cruise Line will set off from Texas on its first voyage as early as the end of 2023.
However, the industry is already on the upswing again, even without the two new giants of the seas. After the near collapse during the pandemic, demand has recently returned to normal. According to credit card data, almost 19% more was even spent on cruises in June than in 2019, before the emergence of the Corona virus. Also having a positive impact on bookings is the growing shift in consumption from goods to experiences. According to an analysis by Allied Market Research, a rosy future lies ahead for cruise ships. The market is forecast to double from USD 8.0 billion in 2021 to USD 16.7 billion in 2031. This corresponds to an average annual growth rate of 7.9% within this period.
The revival of the sector has not gone unnoticed on the stock market. With price jumps of more than 100% since New Year's Eve, numerous shares of cruise operators are among the biggest winners this year. Despite the rally, however, the share prices are still well below previous highs. Take Carnival, for example: while the British-American group is currently one of the strongest performers in the sector, up 125%, it is trading at only a quarter of its record high in 2017.
The strong performance is based on an operational growth trajectory. Indeed, the world's largest cruise operator, which includes Carnival Cruise Line as well as AIDA and P&O Cruises, is seeing bookings fluttering in. "Occupancy for the full year 2023 is expected to be 100% or higher," Chief Financial Officer David Bernstein enthused when presenting the second quarter report. But not only the outlook is dazzling, the interim results themselves were also convincing. Adjusted loss per share of 31 cents was better than the consensus estimate of 34 cents. Meanwhile, sales doubled to more than USD 4.9 billion, also exceeding expectations. In addition to rising demand, Carnival was helped by higher ticket prices. The trend seems to be continuing, as the cruise giant raised its forecasts. An adjusted annual loss of between 8 and 20 cents per share is now expected; previously, a range of minus 28 to minus 44 cents was targeted. For the third quarter just underway, earnings per share are even forecast to be positive, between USD 0.70 and 0.77.
The company has also set itself various long-term targets that appear quite ambitious. For example, CO2 emissions are to be reduced by more than a fifth by 2026 compared to 2019. In addition, management sees great potential on the earnings side. The plan is to increase Ebitda by 50% over the next 3 years. Not only should margins continue to improve thanks to its industry-leading cost base and fuel efficiency, but adjusted free cash flow is also expected to increase, which the company believes will enable further debt reduction over time. Carnival is already busy reducing debt. As a result, total debt is expected to be reduced from a peak of USD 35 billion to less than USD 33 billion by the end of 2023. In addition, excess liquidity is being used to repay loans early and reduce interest expenses.
The industry's recovery has put Carnival's stock into speed mode. After the triple-digit percentage gain, it would not be surprising if the stock shifts down a gear soon. Products with conditional partial protection could therefore currently be a good alternative. For example, the new Softcallable Barrier Reverse Convertbiles convert a leisurely ride of the share into double-digit percentage returns. The CHF version offers an attractive interest rate of 16.00% p.a. with a maximum term of one year, the USD-denominated product even comes with a coupon of 19.00% p.a., which is paid out quarterly. Furthermore, the products are equipped with comfortable risk buffers of 41%. Consequently, the Carnival share may reset without the yield opportunity being diminished. Only if the barrier is breached could there be markdowns. Then the closing price decides on profit or loss of the investment. If the underlying returns to the starting level by the final fixing, the full nominal value is paid out in addition to the secure coupon. Otherwise, the redemption is based on the performance of the Carnival share.
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