Demand Continues to Impress at Norwegian

We don’t plan any material change to our $28 per share fair value estimate for no-moat Norwegian Cruise Line Holdings NCLH after updating our 2023 outlook and view shares as undervalued. Fourth-quarter results displayed continued progress toward profitability, although less than expected (EPS loss of $1.04 versus a FactSet consensus loss of around $0.90), leading to a second-half total that failed to deliver above breakeven EBITDA. We think that both this shortfall, as well as a lower-than-expected EPS outlook for 2023 ($0.70 versus our forecast for more than $1.00) have been the key instigators driving the post-print share price lower by about 10%.

However, with occupancy set to reach 100% in the first quarter and pricing (yields) slated to rise (versus 2019) over the entirety of the year, we see Norwegian’s performance on the upswing in fiscal 2023. In fact, given the visibility provided by the 62% of 2023 itineraries that are already booked, the $2.7 billion in advance ticket sales on the balance sheet (30% higher than 2019), and a 2023 cumulative booked position that is ahead of 2019 levels (including a 19% increase in capacity) at higher pricing, we’d contend that consumers’ appetite for travel is still robust. Ultimately, this momentum, along with three new ships set for deployment in 2023 (likely to capture price premiums), offer us confidence that Norwegian should easily achieve its forecast yield growth of 4.75%-6.25% as-reported over 2019 levels.

On the expense side, benefits from savings initiatives could accrue faster than expected, as those already undertaken are set to lower adjusted net cruise costs ex-fuel by 15% in 2023 from the second half of 2022. Moreover, Norwegian is facing normalizing inflation in food and logistics expenses, a traditional pace of dry docks, leverage from occupancy scale, and lower marketing requirements, which combined should allow costs to decelerate over the course of the year.