In ordinary times, you can count on cruise lines to turn a profit. But, alas, these times are anything but ordinary, and as cruise ships lay dormant in ports around the world, a rethink is in order just to ensure survival.
That said, according to Wedbush analyst James Hardiman, Royal Caribbean (RCL) has enough liquidity available to see it through to February 2021 based on "an industry shutdown scenario.”
How does Hardiman arrive at such a conclusion? With operations shuttered, Royal Caribbean recently said that its monthly cash burn rate is between $150-$170 million. But with the addition of further outlays such as hedging costs and debt service expenses, the figure increases to between $250-$275 million a month.
In the meantime, the company has secured a $3.3 billion loan through a private offering of senior secured notes. After paying back loans amounting to $2.35 billion, Hardiman estimates RCL will have $1 billion left, “giving the company what we estimate would be pro-forma liquidity of ~$3.4B.”
Hardiman adds to the mix another $20-$50 million of monthly cash outflows. Where does this leave Royal Caribbean?
“Relative to the $3.4B of liquidity (with a $300M covenant-mandated floor),” Hardiman says, “This comes out to about 10 months of available liquidity on hand, which gets us into February of next year in a minimal revenue environment.”
However, even in a worst-case scenario, Hardiman doesn’t foresee RCL requiring a lifeboat, as it has further options.
The analyst concluded, "It remains to be seen whether or not RCL will be cash flow positive by early 2021, and yet we can appreciate what appears to be a hesitation to follow in the footsteps of both CCL and NCLH in significantly diluting shareholders by way of an equity offering. Such an offering nonetheless remains a viable option for the company, and so we have minimal concern that the company would actually run out of liquidity."
Accordingly, Hardiman keeps an Outperform rating along with a $63 price target. The implication for investors? Potential upside of 44% from current levels. (To watch Hardiman’s track record, click here)
All in all, the rest of the Street’s outlook for the struggling cruise line is a mixed bag. A Moderate Buy consensus rating is based on 5 Buys, 6 Holds and 1 Sell. However, the bulls are at the helm, as the average price target comes in at $67.80 and implies potential upside of 55%. (See Royal Caribbean's stock analysis at TipRanks)
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