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UBS upgrades NCLH to 'buy' on Prestige accretion, growth

UBS upgrades NCLH to 'buy' on Prestige accretion, growth
UBS Investment Research upgraded Norwegian Cruise Line Holdings to 'buy' from 'neutral,' citing accretion from the Prestige Cruises acquisition and future growth from capacity additions. The price target, previously $39, goes to $55 and is based on 16 times the brokerage's 2016 earnings per share estimate of $3.65.

UBS incorporated accretion from the Prestige acquisition into its estimates, which go to $2.82 from $2.52 for 2015—at the midpoint of NCLH's $2.70 to $2.90 guidance, and to $3.65 from $3.04 in 2016 and to $4.49 from $3.75 in 2017.

UBS's 2017 outlook is not as high as the $5 EPS that NCLH management guided, 'but we think the stock is a "buy" even with our earnings view,' analyst Robin Farley said in a note. She said the EPS target would more than double the $2.27 adjusted EPS of 2014, and net yield growth of 2% to 3% per year could drive about half of that. Plus, capaacity growth will lift earnings.

'The Prestige acquisition gets NCLH through an 18-month period with no new ship deliveries,' Farley said, then each of the brands will be adding berths—Norwegian Escape in October, the acquired Sirena (ex Ocean Princess) in April 2016 and Seven Seas Explorer in summer 2016.

Farley told investors the Prestige acquisition is driving 20% growth for 2015, without adding industry capacity, and the additional ships will account for 9% to 10% growth in each of 2016 and 2017.

UBS added that price checks point to an improving wave season in recent weeks and said NCLH has the least exposure to downside from the strong dollar since only about 17% of customers are sourced outside the US. However, the company uses fuel cost hedges the most aggressively of the three major operators and if fuel prices decline further from current levels, it could benefit less from those declines.

Should fuel prices stay at current levels, 2016 at-the-pump prices may be up mid-single digits year over year, but NCLH hedges will result in the price per metric ton including hedges to be down 4% year over year, driving 8 cents of benefit to 2016 EPS, Farley said.

UBS noted Genting Hong Kong still has about a 25% stake in NCLH and last year signaled it might exit by getting shareholder approval, valid until May 2015, to sell its holding.

 

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