Carnival shares could hit $0 in face of 'demand shock', says Morgan Stanley

MS cut its price target for Carnival UK shares to 575p from 1,050p, and said that in a bear case scenario, the stock price could reach $0.

The bank said: "Carnival’s liquidity of $7.5bn appears to give it a solid cushion given cash burn is improving…but the company has $4bn of debt maturing in the next 18 months, and $5bn of its cash is customer cash.

"Therefore, if the high yield market closes, and/or if there is a demand shock that causes trip cancellations or weak bookings (and hence customer deposit outflows), liquidity could quickly shrink.

"Even then, leverage looks unsustainably high we think, with net debt remaining more than $30bn for the foreseeable future, nearly triple its pre Covid level. We think this needs to come down to under 4xFY23, to around $20bn or so, which implies a circa $12bn equity raise."

MS said this is similar to Carnival’s market cap, so could require a material and therefore likely very dilutive, discount.

"If its equity value drops much further, it could become very challenging to raise this much," the bank said. "We introduce a new $0 bear case, and reduce our price target by nearly half."

MS said it was cutting its forecasts again following the company’s "weak" second-quarter results and guidance. The bank’s FY22 EBITDA forecast drops from $0.9bn to a loss of $0.9bn due to weaker-than-expected occupancies, weakening pricing, elevated unit costs and higher fuel costs.

In addition, its FY23 EBITDA forecast drops 10% to $5.0bn as it factors in some occupancy pressure from continuing health protocols over the winter, as well as weaker pricing. MS’s earnings per share forecasts come down more due to higher financing costs, with a 63% increase in FY22 losses, a 46% downgrade to FY23 EPS and a mid-teens downgrade thereafter.

At 1515 BST, Carnival’s London-listed shares were down 17% at 643.96p, while US-listed shares were down 15.8% at $8.70.