Carnival PLC CUK_CCL Review

Largest Cruise operator. Listed both in NYSE and LSE. 2 counters listed in NYSE which is CUK (ADR) and CCL. We will be looking at CUK since it is offering a higher yield and potentially without withholding tax since it is a UK listed company.

Good valuation numbers and overall score. Not yet reach 30% discount. Currently at 25%.
Entry point at $40. Need to look at its annual report for more clarity.
Currently indicating a low debt financed business with good cash flow sustaining a 4% dividend yield. Strong Moat in terms of brand recognition and huge barrier of entry (not everyone can go and buy a cruise ship easily and start competing with Carnival). Their business have various brands that cater to different market segment.

Not sure of IMO impact, potentially higher fuel cost if ship need to burn LSFO.
If general economy weaken, lesser tourist will go on cruise which is not cheap. There is sign of general economy weakening. Potentially will impact their business performance in future.
Dividend maybe cut if the FCF is not enough.
Capital intensive business though their ROE and net profit margin is respectable at teens level indicating that it is not in a low margin business.
Brexit may not have an impact to this UK listed company in view of its global operation.

In terms of historical valuation, it is trading near historical low at 26% vs 10 year median level of 22%. The lowest point is 50% in 2008/09 during GFC but thereafter rebound strongly. During that time, price drops to 20s indicating a 50% drawdown from current price. This is the worst case scenario volatility that we can expect. Even during that period, company did not make loss and still pays a dividend.

1.2B in cash, short term debt of 2B vs long term debt of 9B and shareholder equity of 24B.
Interest coverage is ~7-8x on net profit basis. Revenue increase but Onboard and fuel cost increase much more leading to lower profitability. Operating margin is ~10% while net profit margin is 7-8%.
Interest expense is 200MM versus net income of ~1.6B and dividends of 1.4B.
Operating cash flow is ~5.5B vs CAPEX of 3.5B. dividends can be financed from FCF.
Going forward, forecast CAPEX requirement is 6.7 , 5,7, 5.9, 5.3 every year from 2019 to 2022 leading to annual capacity increase of 4.5-7.3% with new ship growth.
The operating cash flow need to cover the above CAPEX requirement else more debts are required.
Current long term debt are evenly spread out from 2021 to 2030. Near term big maturity is at 2022 with 2B of debt maturity and 1.2B at 2023.
Total new ship growth capital expected is 19B from 2019 to 2023 for 5 years versus operating cash generation of ~5-6 B per year. The cash generation capability will largely finance the new ships without huge amount of debt. Dividends payout and share buybacks need to be measured/controlled to avoid taking on more debts.
New ships are larger and more efficient and replace the older fleets. Their fleet size does not increase much and stay near to 100 for the past 5 years while growing the overall passenger capacity and passenger carried which is a good sign.