Genting Hong Kong’s cruise business to sail through rough seas ahead

Sharp turnaround in 2Q11. Spurred by a 19% yoy increase in revenue and improved operations across the board, NCL posted a net profit of US$29m in 2Q11, turning around from a US$15m loss in 2Q10. As a result of a 15% yoy increase in capacity days following the launch of Norwegian Epic in Jun 10, revenue from passenger tickets grew 20% yoy while onboard spending rose 17.5% yoy.

2Q11 EBITDA surged 29.5% yoy (+51% qoq), taking 1H11 EBITDA to US$204m, or 43% of our full-year FY11 forecast. Despite a 17% yoy (+14% qoq) jump in fuel prices per metric ton, EBITDA margins expanded from 2Q10’s 19.8% and 1Q11’s 16.4% to 21.6% in 2Q11 as cost rationalisation and higher operating leverage continued to take effect.

Possible headwinds. In conjunction with the summer holidays in the US, 3Q is typically the strongest season for US cruise operators. Taking cues from NCL’s FY10 results, EBITDA in the third quarter alone could constitute 45% of the full-year figure. Assuming this and taking into account 1H11 EBITDA of US$204m, our FY11 EBITDA forecast of US$470m for NCL appears conservative.

However, as advanced economies slow down further, the US cruise industry might be sailing into headwinds beyond 3Q11. As NCL generates 83% of its ticket revenue from reservations made by North- American passengers, its profitability could be squeezed by any slump in the US
economy. Hence, we are keeping our conservative FY11-13 earnings estimates for NCL until further clarity emerges.

Possible headwinds for NCL, but upbeat on Star Cruises and Travellers. While taking a cautiously positive view on the US cruise industry, we remain upbeat on the Philippine gaming market; even its Asia-based Star Cruises shows growth prospects. Our previous forecasts for Star Cruises and Travellers appear too conservative. Meanwhile, although NCL posted robust 2Q11 results, we are keeping our forecasts until further clarity emerges on growth in advanced economies.