Norwegian’s Return to Profitability on the Near-Term Horizon with Entire Fleet Deployed

Business Strategy and Outlook

Changes to consumer behaviour surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents over an extended horizon. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which have proven successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. Still, it’s expected Norwegian could intermittently see pricing competition as global supply returns to market, limiting near-term yield upside (also impacted by the redemption of future cruise credits through year end). On the cost side, inflated spending on the procurement of goods and higher oil prices could keep costs exacerbated in 2022. However, it is expected both pricing and costs to normalize over time, rising at a low single digit rate longer-term. Altogether, these factors lead to average returns on invested capital, including goodwill, these are set to fall below 10.5% weighted average cost of capital estimate over a multiyear period, supporting no-moat rating. Norwegian has carved out a compelling position in cruising, thanks to its freestyle offering, the product still has to compete with other land-based vacations and discretionary spending for wallet share. However it’s harder to capture the same percentage of spending over the near term, given the perceived risk of cruising, heightened by previous media attention.

While liquidity issues appear to be alleviating for cruise operators, Norwegian was able to liberally access the debt and equity markets since the beginning of the pandemic. Such capital market efforts signalled Norwegian’s dedication to weathering a return to normalcy for demand. Given that the firm should return to profitability in the back half of 2022, the $2.1 billion in cash of Norwegian’s balance sheet (as of March 2022) should provide ample dry powder for the firm to operate with over the near-term

Financial Strength

Norwegian has accessed significant liquidity since the beginning of the pandemic, most recently raising around $2.1 billion in debt in February 2022 to retire expensive, early pandemic issued notes with rates above 10%. These efforts signal Norwegian’s dedication to optimize its balance sheet opportunistically. Given that cash demands should largely be covered by advance ticket sales with the fleet fully redeployed, the liquidity constraints are becoming less worrisome, and that cash on the balance sheet ($2.1 billion as of March 2022) should provide cushion for a smooth operating conditions. Although the company is set to remain cash flow negative in 2022, it is expected it could achieve positive EBITDA performance for the full year. However, when considering the plethora of debt raises since the beginning of the pandemic, Norwegian is likely to remain above its 2.5-2.75 times net debt/adjusted EBITDA target it had previously sought to achieve. It doesn’t have Norwegian reaching around this range until 2028 as it slowly pays down debt and finances new ship purchases, implying a return to investment grade is a longer-term focus. Additionally, the firm surpassed its debt/capital covenant of less than 70%, ending 2021 at around 84% (with restrictive covenants waived into 2022), indicating a higher risk balance sheet.

Bulls Say’s

As Norwegian is smaller than its North American cruise peers, it has the ability to deploy its assets nimbly as cruising demand rises, allowing for strategic pricing tactics.

The further rescission of COVID-related travel policies (particularly internationally) could allow cruises to appeal to a wider cohort of consumers, leading to demand growth faster than it is currently expect.

Norwegian has capitalized on leisure industry knowledge from its prior sponsors as well as the addition of high-end Regent Seven Seas and Oceania brands, gathering best practices and leverage with vendors

Company Profile

Norwegian Cruise Line is the world’s third-largest cruise company by berths (at nearly 60,000), operating 28 ships across three brands (Norwegian, Oceania, and Regent Seven Seas), offering both freestyle and luxury cruising. The company has redeployed its entire fleet as of May 2022. With nine passenger vessels on order among its brands through 2027 (representing 24,000 incremental berths), Norwegian is increasing capacity faster than its peers, expanding its brand globally. Norwegian sailed to around 500 global destinations before the pandemic

(Source: MorningStar)

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