Norwegian Cruise Line 2024 Investor Day Takeaways: She Sails Regardless of Debtweight (NCLH)

Funding Thesis

Barring Norwegian Cruise Line Holdings (NYSE:NCLH), cruise shares usually loved 2024 with the natural demand tailwinds of their sail. Carnival Corp. (CCL) returned over 40% in 2023, whereas the biggest cruise operator of all of them, by way of market cap, Royal Caribbean Cruises (RCL), delivered at the very least twice the returns as in comparison with Carnival Corp. in 2023. In comparison with them, Norwegian Cruise Line Holdings delivered sub-par efficiency, returning low double-digit returns within the inventory market.

On a year-to-date foundation, Norwegian’s inventory continues to languish on the backside, as seen in Exhibit A under, after projecting progress targets that missed consensus estimates.

Norwegian concluded their 2024 Investor Day, which confirmed some enhancements in distinction to their earlier FY24 projections.

Primarily based on my evaluation of Norwegian Cruise Strains’ improved forecasts, I imagine the inventory now offers a compelling outlook, main me to provoke a Purchase ranking on the inventory.

Word: I can be referring to Norwegian Cruise Strains as simply Norwegian on this observe.

Updates to Steerage in 2024 Investor Day

First, Norwegian’s administration batted itself right into a nook of their Q1 earnings name after they projected a full-year FY24 outlook for the corporate’s anticipated internet yield to develop 6.4% versus FY23. Web yields are an necessary headline metric for cruise operators that accounts for revenues earned from passenger ticket pricing and gadgets passengers spend onboard the cruise, corresponding to eating, therapeutic massage, onshore actions, and so forth., after prices corresponding to agent commissions, transportation, and different bills.

Per Norwegian’s administration, this was supposedly an improve of their outlook on condition that that they had beforehand forecasted internet yields to develop simply 5.4% y/y in FY24. Clearly, this was not properly appreciated, particularly when Norwegian’s friends had been guiding their respective FY24 internet yields to develop within the ~10% mark. This positively put stress on Norwegian’s administration, and so they got here out on Investor Day with some extra updates to their FY24 steerage, with internet yields wanting barely higher. I’ve added this to the desk under.

Norwegian FY24 1st steerage

Norwegian FY24 2nd steerage

Norwegian FY24 ultimate steerage

Royal Caribbean

Carnival Corp

Projected Web Yield FY24 progress price

~5.4%

~6.4%

~7.2%

~9.5%

~9.5%

Click on to enlarge

Right here’s a screenshot from their Investor Day presentation that summarizes key forward-looking metrics in Exhibit B under.

Primarily based on their up to date internet yield progress figures, that ought to translate to at the very least $9 billion in anticipated income this yr, per slide.

One can see how Norwegian’s earlier anticipated internet yields had been falling far behind the competitors. This both pointed to slowing client tendencies that had been uniquely seen in Norwegian’s cruise enterprise or to administration being conservative.

However Norwegian’s administration sounded extra optimistic of their Investor Day presentation versus their Q1 FY24 presentation as they offered progress areas that they had been prioritizing.

The Miami-based cruise operator talked about they’ve ordered 13 new ships, 4 of that are anticipated to interchange growing old ships this yr, topic to financing. Every of those 13 ships is anticipated to extend passenger capability by at the very least 9% on a per-ship foundation, with their higher-end Oceania cruise ship capability anticipated to extend by over 20% and their luxurious line, Regent, seeing ships that may enhance capability by 13%. This appears promising since each their Oceania and Regent strains have a share of high-net-worth-income [HNI] cruisers. I’ve added a slide under in Exhibit C that reveals how administration plans to deploy their ships throughout cruise places by 2026.

Administration additionally talked about initiatives round investments that concentrate on non-public islands within the Bahamas/Belize area. This was additionally acknowledged by administration of their Q1 FY24 name, the place they talked about investments being made, particularly within the Bahamas’ Nice Stirrup Cay.

Investing in non-public islands is a brilliant thought, for my part, and is sort of just like the technique utilized by its bigger peer, Royal Caribbean, since this expands the scope for passengers to spend extra onboard.

The bullish case for progress in Norwegian

There are two the reason why I imagine Norwegian may see further progress in 2024, and one among them is paradoxically the rationale that constrained Norwegian’s from issuing stronger steerage.

First, the complete cruise business continues to see progress in 2024, and most cruise operators introduced document bookings of their particular person Q1 earnings stories. In line with the CLIA, as seen in Exhibit D, the variety of ocean-going passengers is anticipated to rise by 12.6% in 2024, and progress is meant to normalize between 2024 and 2026 at a ~4.4% CAGR extra in keeping with the pre-pandemic progress charges of 4.5%.

The second motive that I discover distinctive to Norwegian is predicated on the power of their cruise passenger demographic, which sees them spend much more on the cruise. Per the Investor Day presentation, 84% of the corporate’s bookings originate from the USA/Canada area and are a mixture of GenX and Millennial greater revenue passengers. The combo of HNI cruisers means extra spending whereas on the cruise along with revenues which can be earned from ticket bookings. In Exhibit E, I present how greater spend by passengers onboard Norwegian’s cruise vessels meant Norwegian noticed comparatively greater Onboard Income progress in FY23.

In my view, it is a very significant income phase for Norwegian as a result of Onboard Income accounted for ~49% of Norwegian’s revenues in 2023. Right here’s one other slide from their Investor Day that reveals how clients spend onboard Norwegian’s cruise ships.

Provided that cruise operators have reported sturdy bookings by means of Q1, I imagine these tendencies will uniquely enhance Norwegian’s outlook as we proceed by means of the yr when most cruises have already set sail. I imagine administration can be conservative in guiding FY24 numbers since it’s often simpler to foretell bookings from ticket gross sales than onboard income.

These tendencies, for my part, will create lumpy performances within the first half of FY24 however ought to get higher as we transfer by means of the second half of FY24, assuming there are not any macroeconomic shocks that reverse the patron spending outlook.

Norwegian’s Capital Construction Dangers

I’ll admit that Norwegian’s steadiness sheet is a giant threat, particularly if the financial system swings into recession, halting all client spending, particularly discretionary spending.

There isn’t any secret right here that Norwegian is a debt-heavy enterprise, which has gotten even bigger after the corporate needed to increase its debt ranges by virtually two occasions whereas on the identical time diluting its share base to boost sufficient funds to maintain the enterprise afloat.

Per its current 10-Q, Norwegian is severely indebted, carrying ~$14 billion in debt and about half a billion in money. Which means Norwegian should stroll a skinny line, refinancing its debt at rates of interest it deems most favorable for itself and its shareholders whereas elevating its money circulate outlook.

However so long as demand sustains and shoppers proceed to spend on cruises, Norwegian ought to be capable to inch nearer to holding debt leverage nearer to its pre-pandemic ranges. Administration has issued some significant steerage in direction of elevating money circulate targets into 2026, as I’ve hooked up in Exhibit G under.

On the identical time, administration has additionally guided in direction of driving its debt leverage decrease to its pre-pandemic ranges, as I’ve illustrated in Exhibit H. Whereas its curiosity protection ratios are nonetheless low, I count on them to be greater primarily based on my outlook for his or her adjusted EBITDA and administration’s FCF outlook.

Regardless of its debt load, Norwegian has upside

My valuation fashions counsel that after I account for all of the curiosity bills in direction of servicing its excessive debt ranges, I nonetheless imagine Norwegian has upside. Listed below are my assumptions:

As specified by Exhibit B and different sections, I count on gross sales will develop quicker than their steerage ranges. For now, I assume progress charges are in keeping with the cruise market and its friends within the excessive single digits. I additionally count on the overall market progress charges to enhance by means of the yr, so I could replace my income progress charges for Norwegian greater by means of the yr.

I count on administration to realize at the very least 20 b.p. of adjusted EBITDA margin enlargement on common per yr between 2024 and 2026. Word that administration has already guided FY24 adjusted EBITDA of round ~2.3 billion, which represents a margin enlargement of 270 bp.

Low cost charges of 13.2% to account for greater threat attributable to its debt load versus some micro-assumptions.

I’ve assumed a considerably greater share excellent base of ~470 million. It’s because Norwegian’s administration has already guided a share dilution of ~$90 million, or ~10%, in FY24 to service a few of its debt. I’ve added barely greater dilution charges to account for the margin of error. Submit FY24, I count on dilution charges to stabilize to ~1% as greater FCF yields ought to assist in servicing debt.

Primarily based on my forecasts, I estimate adjusted EBITDA to be rising 13–14% whereas income must be rising within the 8–9% vary. This could warrant a double-digit ahead earnings a number of if I examine Norwegian’s EBITDA progress price to the S&P 500. Nevertheless, after I account for ~$750 million of curiosity bills to service debt, the online adjusted EBITDA left for buyers to worth implies a ahead PE of ~5.

Primarily based on my calculations, after accounting for debt servicing, I imagine Norwegian nonetheless has between 24 and 26% upside. In fact, the corporate’s capital construction dangers make this much less interesting, main me to suggest a Purchase ranking. In any other case, I might have hooked up a Robust Purchase ranking.

Takeaways

Norwegian Cruise Line does have sufficient motive for buyers to be skeptical in regards to the inventory. The lack to information in direction of greater progress charges on par with its friends has not appealed to buyers up to now in 2024. On the identical time, the corporate’s capital construction makes this much less favorable to a broader vary of buyers.

Nevertheless, I see sturdy demand within the cruise enterprise, which ought to hold the momentum going for Norwegian. Plus, Norwegian’s distinctive buyer mixture of high-net-worth people ought to propel the corporate’s revenues greater into FY24.

I like to recommend a Purchase on Norwegian Cruise Line’s inventory.