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William Blair sees 'modest moderation' of losses at Carnival Corp.

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Ahead of Carnival Corp. & plc's third quarter business update Friday, brokerage William Blair forecasts a 'modest moderation' in losses as more ships return to service.

'With all but one of Carnival’s brands (P&O Cruises Australia) resuming operations during the quarter, we expect Carnival’s quarterly revenue to reach its highest level since May 2020, yielding a modest improvement in net losses as increased at-sea profitability is partly offset by restart expenses,' William Blair analyst Sharon Zackfia said in a note. She added that by quarter-end, about 35% of capacity was in service but at lower than normal occupancy, estimated to average roughly 50% for the quarter.

Further improvement in Q4

For the rest of 2021, 19 additional ships have announced itineraries, with more than 50% of Carnival’s full fleet expected to be sailing by the end of the November quarter. With the progression in sailings to roughly 46% of capacity and the assumption occupancy will rise the longer ships are at sea, averaging 65%, William Blair projects further improvement in both revenue and operating losses in fiscal Q4.

Delta variant's impact

The Delta variant's impact on bookings remains a key question, though Zackfia noted the cruise industry enters a slower booking period in September through December anyway, 'rendering the impact more manageable,' in the brokerage's view.

As a result, William Blair expects cumulative net bookings for 2022 to remain ahead of 2019.

Looking to 2022, the brokerage projects Carnival Corp. to approach break-even based on a weighted average of 85% of ships in service, including roughly the full fleet by summer, and increasing occupancy levels returning to about 100% by the summer — although still below pre-pandemic 100%-plus levels.

'Goal to exceed 2019 EBITDA levels by 2023 remains achievable'

'While 2022 is likely to remain somewhat of a transitional year, we believe management’s goal to exceed 2019 EBITDA levels by 2023 remains achievable,' Zackfia said.

William Blair reaffirmed its 'market perform' (hold) rating for CCL, noting that while the brokerage is optimistic for a broad resumption of cruising, it continues to view Carnival stock as already pricing in a recovery at a valuation of about 17 times post-pandemic earnings power of approximately $1.35 per share. This assumes a return to 2019 revenues/margins alongside the dilutive impact of debt and equity issued during the pandemic.

CCL opened at $23.18 Monday with shares trading down about 3% at mid-morning.

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