NCL: Bleeding Resorts Dry

I recalled that fantastic poem, The Rime of the Ancient Mariner. Like an albatross around its neck, the Norwegian Cruise Line Holdings ASA (NCL) is suffocating Resorts World, draining its potential profits through continuous cash injection thus reducing potential profits for its shareholders.

Resorts World might have made a costly mistake to go casino love-boat style a while back. But bite the bullet it must. The timing may not be right but bitter medicine must be swallowed. If the gangrenous part is not removed, the whole body can be affected. So that is the situation with Resorts and Star Cruises.

Star Cruises in which Tan Sri Lim Goh Thong’s family holds a 59% stake, paid US$1.1billion for NCL plus assumption of US$800 million debts in 2000. Resorts own 34% or Star Cruises. NCL operates cruise liners in North America and Europe. It has been losing money big time.

For the quarter ended March 31, NCL incurred a net loss of US$60.8million on revenue of US$490.8million. Consequently, Star Cruises also incurred a net loss of US$79.39million and Resorts World’s net profit was trimmed by RM94 million due to losses from this associate company.

So many private parties including Resorts World have to take the losses if a sale is effected especially now when shipping is at its ebb. The upside for Resorts-no need to pump more capital in the form of interest expenses into this bottomless pit of a bleeding company any more. For the quarter ending March 2007 alone, Star Cruises paid net interest expenses of US$54.4 million equivalent to RM187 million.

If NCL is disposed, the fair value of Resorts will rise to as high as RM5.08 on the assumption of 10% annual revenue growth plus a 5% perpetuity growth.

When approached, Star Cruises said it had no comment on the possible sale of NCL and neither would confirm if any negotiation is on-going for its disposal.

Despite the denial statement, the share price of Star Cruises-which is listed in Hong Kong and Singapore-has climbed in recent weeks.

In Hong Kong, the stock surged to a high of HK$2.98 before closing at HK$2.95 . In Singapore, its share price almost doubled to US$0.455 from US$0.285 on June 18.

The market talk also lifted the share price of Resorts World, which rose to RM3.86 from RM3.18 some weeks ago.

Nonetheless, there is scepticism that Star Cruises will find a buyer for NCL as the timing is not right, given the challenging environment amid rising fuel costs and growing competition that continue to squeeze profit margins.

So let us watch how Genting anf Resort will extricate themselves from this NCL fumble. An albatross around its neck,its getting heavier by the day.

Heartsong