Royal Caribbean Gets Exposure to Ultraluxury Market
Taking a majority stake in Silversea should help Royal build more robust brand awareness, supporting its brand intangible asset and narrow moat rating.
Royal Caribbean (RCL) is taking a 67% position in ultraluxury cruise operator Silversea, at the cost of $1 billion, financed with debt, and set to close in the company’s fiscal third quarter. While this transaction doesn’t materially change the size of Royal’s business (adding roughly 3,000 berths, or incremental growth of 2% in capacity), it taps into a consumer market Royal Caribbean has not had exposure to in the past, the ultraluxury cruiser, positioned above both Azamara and Celebrity on the income demographic scale. From our view, this should help Royal build more robust brand awareness, supporting its brand intangible asset and narrow moat rating.
We increased our fair value estimate to $135 from $132 in response to the incremental growth we expect will stem from the addition of Silversea’s capacity. We have made four major changes to our model as a result of the consolidation. First, we raised yield growth modestly in the second half of 2018 and first half of 2019 to account for the higher per diems a blended rate will drive (by our estimate this should increase 2018 by $3 and 2019 by $7 on a yield per diem basis). Second, we correspondingly raised costs modestly, as we perceive Silversea’s cost structure as less favorable than Royal Caribbean’s, acting as a drag on 2019 EBITDA margin (to below 31%, from an estimated 31.8% in 2018). Third, we adjusted depreciation upward for the additional depreciation that will flow through the profit and loss statement. And finally, we added both $1 billion in debt as well as the incremental $500 million (not callable until 2020) in leverage from Silversea that Royal will have further debt service to address.
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Jaime M. Katz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.