Havila Kystruten – Resolves Debt and Equity Concerns: Share Price to Double

Havila Kystruten (HKY) operates 4 ships on the Norwegian Coastal Route. The share price is down 90% in since April, driven by concerns whether HKY could refinance its debt and raise new equity. It did both. Under our base case, the share price could double in the next few months.

Why is the share price down 90%?

Havila was IPOed at 25 NOK two years ago. This year the share price slid from 20 NOK to 1.2 NOK. There were several reasons:

• Sanction-driven need to refinance quickly Russian debt financing
• Financial constraints resulted in delayed delivery of ships.
• Dilution risk
• Earthquake in Norway

The uncertainties have been resolved

During the last few weeks, the company made material progress on all fronts:

• Refinanced 305 million EURO debt
• Raised 65 million EURO equity
• Settled all payments for the two ships to be delivered
• The ships should be delivered in 17 days from last Monday

Why invest now?

HKY raised 65 million Euros at 1 NOK per share. The shares became tradable on Friday. Short-term traders sold, causing the share price to decline from 2 NOK to 1 NOK. There is plenty of reasons to buy:

• The issues that drove the share price down have been resolved – both debt and equity have been refinanced.
• Two ships are in operation, and two brand new ships are on the way from the shipyard in Turkey to Norway. They should arrive within 14 days. The arrival should be a major catalyst for the share price.
• Sound business proposition – there are 15 ships on the Norweigan coast road – the competitor has ships on average 11 years old. Havila has 4 brand-new ships.
• Highly profitable route – HKY´s competitor runs the route with 80% utilization. HKY has more modern ships – its utilization should be at least similar. At 80% occupancy HKY should generate SEK 600 million EBITDA per year.
• Government subsidized route – Norwegian Government provides 25% of all the revenues as a subsidy – 411 million NOK per year till 2030 with monthly payouts.
• Fuel price capped – cruise ships run on LNG, and the LNG price is capped by the Norwegian government.
• Compliant with Norway’s zero emission regulatory framework, and eligible to receive ~NOK 328m (~EUR 29m) from NOx fund, of which the remaining 50% is expected to be received later in 2023
• Strong shareholder – Havila family owns around 60% of HKY. They have always participated in all capital raises.

HKY valuation

According to the HKY, the cost of the four ships was 442 million EURO. The current replacement value would be 600 million EURO. Net debt is around 300 million EURO. So the book value of equity should be around 300 million Euro. The current market capitalization is 120 million Euro. If you assume that the share price should be trading at book value to equity, the share price should go up by 250%.

The three cruise companies (Royal Caribbean, Norwegian Cruise Lines, and Carnival) trade on average at 9.8x 2024 EV/EBITDA multiple. If you would take HKY´s EBITDA estimate (slide 15) of 0.6 bln NOK, then the company EV should be around 550 million EURO. That is still well over two times above the current share price.

I spoke to one of the analysts that were part of the syndicate. His price target was around 3 NOK – triple above the current share price. The reason is – HKY has a modern ship portfolio which should result in higher fees and higher revenues and higher valuation.

Leverage in line with other cruise operators

Peer leverage (measured by Net Interest Bearing Debt / EBITDA) of Royal Caribbean, Norweigan Cruise Lines, and Carnival is between 4.4X-5.5x on 2024 estimates and 5.5x-7.1x on 2023 estimates.

Fearnley estimates the 2024 EBITDA of HKY at around 50 million EURO, which represents around 6.5x NIBD/EBITDA multiple. HKY 2024 leverage is in line with the peers on their 2023 estimates and a bit higher on their 2024 estimates. In summary, the HKY leverage is in line with the peers.

Company presentation from the capital raise

Summary

We bought in the capital raise. We believe there are plenty of catalysts for the investment story. The first will be the delivery of the ships.

We will start selling around 2 NOK per share, hoping for an average exit price well above this.

Review the previous blog posts for further ideas.

We are very bullish on Biovica International. They have the first-ever FDA-approved biomarker cancer test. Biomarkers will change the way cancer is treated. Biovica is one of the global leaders. They got Medicare signed up two weeks ago – that covers 50% of US breast cancer patients. Great achievement. Very very cheap. Worth the look. See:

Biovica – One of the Most Interesting Scandi Pharma – Notes from the Call with Mgmt

Disclosure: 

The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.