Viking Holdings (VIK) Shares: Niche player in the cruise industry

Viking Holdings Ltd (NYSE:VIK) is a cruise and passenger shipping company that recently had an IPO. The company operates in two segments called River and Oceans, operating a total of 92 vessels, of which 81 were river vessels. and 9 were ocean liners. It operates in the US, Europe and international markets.

One thing that sets this company apart from other cruise lines is that they operate smaller ships and their cruises tend to be more of a cultural and learning experience for a different group of people looking for a more relaxed cruise experience. Typically, larger cruise lines such as Carnival ( CCL ), Royal Caribbean Cruises ( RCL ), and Disney ( DIS ) are known to have these cruises that are very much like a constant party and exposure to constant stimulation, such as be loud music, light shows, explosive colors and while some people like this kind of entertainment, others prefer something calmer and quieter, so Viking offers an alternative for these types of people who prefer to have a relaxing experience than a party experience. The company’s cruises also offer a lot of educational experiences, cultural learning and seminars given by experts in various fields where people can get exposure to their favorite subjects of curiosity.

Because they offer a different kind of experience that includes a more relaxed environment, the company’s target audience also shares a more or less common demographic. These people tend to be 55 or older, wealthier than average, well educated, with a strong interest in history, science, culture and art, and more likely to be retired so they have more time and more income available. Many of the company’s customers are repeat customers who cruise year after year.

Some of the unique experiences this company offers its customers include lectures that focus on art, science, or history, art performances, applied research demonstrations, live TED talks, craft demonstrations, and destination explorations. Many of the destinations covered by these cruises tend to be places of great cultural importance as well as beautiful landscapes where people can explore those areas.

The company’s target audience of over-55s also happens to be the fastest-growing population segment in the US, and they tend to have the most spending power and wealth of any other age group. This is probably because they have been around longer and have had more experience and opportunities to accumulate wealth over the years. Think of it this way, if you started investing in your 401k when you were in your 20s or 30s, by age 55 or older, you’ll have significant portfolio growth because of your 20-30s. years of combination that will allow you to have a more comfortable life. Currently, the 55+ demographic only makes up 30% of the US population, but they own 73% of all wealth, and their net worth has collectively grown from $79 trillion to $111 trillion over the past 5 years. Of course, some of this was due to the fact that a person over 55 became richer, but that is not the only reason. Another reason is that more people have entered this demographic over the past 5 years, meaning that the collective wealth of this group has increased by having more people in it. In the next 5-10 years, we can expect these numbers to increase even more as more people enter this age group and older people are expected to live longer thanks to advances in medicine.

In the first 6 months of 2024, the company’s cruises had an occupancy rate of 94.2%, up from 94.0% in the previous year. River cruises saw a drop in occupancy from 95.0% to 94.7%, but ocean cruises made up for this. Even though occupancy rates increased only slightly, gross margins and net returns (profits) increased significantly, indicating that the company was able to charge higher prices to its customers, and people were okay with that. Adjusted total gross profit increased from $1.36 billion to $1.53 billion, an increase of 12%, and operating profit (net income) increased from $517 million to $543 million, an increase of 5%. Operating income in the river cruise segment increased more than 10% (from $506 million to $568 million), but the same figure was flat for the ocean segment (up slightly from $487 million to $492 million) , indicating that there may be more pricing power. in the fluvial segment than in the oceanic segment. Notice that occupancy in the river segment fell slightly but resulted in higher profits, while occupancy in the ocean segment increased slightly but resulted in flat profits.

As with most cruise lines, this company has a lot of debt. After all, it costs a lot of money to build large cruise ships and it can take many years for a newly built ship to recoup all its costs. Since the company had a recent IPO, it has a cash position of $1.84 billion, but its debt position is about $5.44 billion, giving it a net debt position of 3.60 billion of dollars. Given that the company has an adjusted annual EBITDA of $1.19 billion, it would take the company 3 years to pay off this debt, giving it a net leverage ratio of 3.0x. This is down somewhat from last quarter’s leverage ratio of 3.4x. While that doesn’t look too bad, keep in mind that the company spent $460 million in the last 12 months on debt service (interest payments alone), meaning that debt service can eat up a large portion of its profits. Then again, this is very common in the cruise industry, which is known to be very capital intensive both in terms of building new ships and managing the ships on a day-to-day basis from an operations perspective. This aspect of the business is unlikely to go away anytime soon, if ever.

The company’s forward guidance calls for significant growth over the next year. For the year 2024, it has already sold 95% of the entire capacity and sold 55% of the capacity for the 2025 season. By the end of this year, the company expects to have a 14% increase in advance bookings, followed by another increase of 20% in 2025. Note that the company expects a 12% increase in capacity for 2025 as new ships are delivered, and it will have more cruises to sell, but even with that, the company expects to fill that capacity almost entirely by next year.

In fact, current advanced booking trends are already well ahead of any year in 2019. If this trend continues, 2025 will be the biggest year in the company’s history, both in terms of capacity offered, capacity sold and . total income. Since the company is increasing its capacity by 12% and expects a 20% increase in total bookings, we can assume that it is in the process of raising prices by about 8% between now and next year, but that doesn’t seem to be the case. slowing people down from booking cruises with this company.

In the long term, the company will order more vessels as it sees more opportunities for growth. Between now and 2030, the company expects to add 25 river cruise ships and 10 ocean cruise ships, for a total of 35 new ships. The company has already ordered and is on track to take delivery of 10 new river vessels next year, which is where that 12% capacity increase I mentioned above will come from. It is also on track to add 1-2 new ocean-going vessels every year to its fleet from now until 2030. On the one hand, this has to be positive as the company expects to see significant growth going forward and make these investments, but on the other hand, this will likely increase the company’s debt level and leverage ratio significantly in the coming years, unless these ships can quickly turn a profit. The company is basically betting that the trends it has seen in recent years will continue for the next 10 years, but it is hard to say whether the exceptional economic growth we have seen in recent years can continue like this without any slowdown. .

We’re looking at an interesting company that has seen a lot of growth lately, but its valuation is definitely not cheap. The company has a non-GAAP trailing P/E of 27 and a forward P/E of 63, but that’s largely due to the way it records its profits. For example, last year the company reported a large loss due to a $2.4 billion charge for “Loss derived from private placement,” which is not part of the company’s operations and was a strategic loss for tax purposes. When looking at the company’s EV/EBITDA, we see a more reasonable 16 for the trailing metric and 14 for the forward metric, but even that is significantly above the sector median of 11 and 10 for the trailing metrics, respectively hour and forward. Another relevant metric for the company is price to cash flow, which is 13 (forward), and while that’s not too bad for a double-digit growth company, it’s still above the sector median of 10.

Going forward, the company seems to expect high growth and is ordering a large number of ships to be delivered over the next 5-6 years, but at the end of the day, this company operates in a very cyclical industry and is considered discretionary spending the global economy is already showing signs of slowing down in the next two years. If we were to see a global recession, the company could see a lot of write-offs and its operations could suffer significantly, especially given its heavy debt load. If the company’s valuation were slightly cheaper, it could provide a larger margin of safety for investors, but its current margin of safety is likely limited as it trades at a premium to its peers, although it trades at a cheap valuation compared to general market. (given that the S&P 500 is currently trading at a P/E of 28).

This is an interesting company that I will be watching closely. The stock is already up 36% since its recent IPO, which shows that investors are very bullish on it and there is a lot of hope in its current price. The company has a unique premise and an interesting approach to the cruise business and serves a niche market of people who seem to have a lot of money and free time but don’t want the “noisy” cruise experience offered by other companies. I might consider buying some shares if there is a pullback or if the stock gets cheaper, but at the current valuation, I’ll keep it on my watch list and see where it goes.