Wall Street is on the way to digesting the Prestige acquisition. Where do we go from here?
THE CALL TO ACTION
Similar to many in the investment community, we believe the Prestige deal makes a lot of sense and this week’s stock price surge was warranted. We had already highlighted a positive pivot for NCLH cruise pricing as a result of our survey two weeks to go. As a result, consensus Q3 earnings of $1.08 looks beatable. While the Q4 outlook is a little tenuous for the Caribbean, Prestige’s contribution will be evident. Our synergy forecast is higher than guidance, making current 2015 EPS estimates look conservative. We’re at $2.85 versus the Street at $2.62.
In this note, we focus on the important go forward issues related to the Prestige acquisition:
Strong yield growth
Prestige Cruise International has seen outstanding results the past 4 years due to strong yield growth stemming from an incredibly resilient luxury/premium consumer and the addition of a couple of new Oceania ships. 1H 2014 is off to a good start and we think 2H will be just as good or better; one catalyst is the end of the Insignia 2-yr charter this past April. 2015 should be a solid year as well. The stability of their bookings due to a long lead time (up to 20 months in advance) bodes well for the brands, Regent and Oceania.
Expansion into Asia Pacific
With the acquisition of Prestige, NCL will have a presence in the emerging markets such as China. Based on our analysis from proprietary sources, we believe Prestige’s Asia-Pacific exposure is about 15%, as calculated by estimated capacity days; if Australia itineraries are included, Prestige’s Asia-Pacific capacity of a % of total capacity would be in the 20%s.
While success is highly uncertain in such a market as China, NCL cannot afford to be left behind by RCL and CCL if their gambles pay off in 2015 and beyond. Emerging markets’ cruise business has been growing faster than that in North America and a partnership with Prestige may help alleviate some concerns when NCL do decide to dip their toes in the nascent Asia-Pacific market.
SYNERGIES TOO LOW:
Is the $25m considered too conservative? With $25m in synergies, the NCL-Prestige combo would generate 7% EPS accretion in 2015. We think this is low-hanging fruit and synergies of $40m in 2015 would not be an aggressive target with an additional $20m of synergies in 2016.
We believe most of the cost synergies will lie in corporate overhead efficiencies and better port contracts. As outlined in their presentation, other cost synergy opportunities include customer acquisition costs, purchasing/distribution, fuel, and payroll. Furthermore, according to Norwegian, Prestige has much room to improve on fuel costs.
Some revenue synergies could include: 1) Norwegian should be able to cross market Prestige’s established customer base to help grow The Haven concept. 2) Affluent couples who cruise on Oceania and Regent may consider Norwegian when thinking of a family vacation with kids. 3) Pride of America’s Hawaiian business may become stronger due to changes in marketing tactics.
Genting HK can still sell their shares at any time. It appears that Genting was fine with the deal - not expressing overwhelming support for the addition of Prestige or discontent at the dilution that comes from the new equity offering (20.3m shares). Pro-forma ownership is as follows: Genting HK (25%), Apollo (25%), TPG: 7%, Public shareholders (43%). Only the 20.3m new shares are locked up until end of 2015. The Genting overhang is real but probably mostly priced in.
We applaud management for structuring this deal with Prestige. It sets Norwegian on a different trajectory of growth and more importantly, gives it influence in competing in two areas where it has been largely absent—the premium/luxury consumer and the emerging markets. Accretion is always nice too.
This acquisition does not eliminate the concerns currently surrounding NCLH, which include the prevailing weakness and new competition in the Caribbean, volatile new ship premiums and the risk of Genting/other private equity owners selling shares.
Nevertheless, we believe this deal is a good one and is an example of Norwegian’s long-term commitment to fast growth. On a valuation basis, NCLH is the cheapest in the industry at 13x 2015 P/E (RCL: 14x, CCL: 16x), even after the recent move higher.