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Viking Holdings IPO: Analyzing Market Enthusiasm and Its Financial Outlook

The initial public offering of Viking Holdings Ltd. (NYSE:VIK) was quite successful, raising $1.54 billion at around $24 per share. However, the new investment into the company was only $245.50 million, accounting for only 16% of the total funds raised. The rest of the IPO money will be in the pocket of the two main selling shareholders, TPG and CPP Investments.

This IPO, which occurred May 1, was reported to be 15 times oversubscribed due to huge investor demand for the stock. Since then, the market has kept its bullish momentum toward the company, pushing the share price up almost 31% to $31.40 a share. I think the current valuation is a bit stretched with all this optimism, so would rather wait for a better entry price before taking a long position.

Four reasons for success

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Viking is becoming one of the premier cruise operators in the industry. Several key features distinguish the company from other global cruise operators.

First, it targets English-speaking travelers aged 55 and above, who have ample time and financial resources to explore the world. Additionally, its cruises typically do not allow guests under 18 years old. This specific focus enables Viking to tailor its offerings precisely to the needs and preferences of this demographic, providing a more individualized and premium service by not trying to cater to everyone.

Second, since Viking's cruises emphasize river destinations, most of its vessels are smaller than ocean liners, optimizing space and allowing them to dock in city centers. The company currently operates 80 river vessels and only nine ocean ships in its fleet. The thoughtful vessel design maximizes space utilization by excluding features unnecessary for its target customers, such as casinos and extensive entertainment facilities, allowing Viking to offer a superior product at competitive prices.

Third, Viking employs a strategic approach to marketing, emphasizing direct marketing and direct bookings. Since 1997, the company has invested $2.80 billion in marketing in marketing spend, mainly on direct marketing. Viking currently owns marketing database of whopping 56 million North American households, including 1.50 million households that have previously traveled with the company. By enabling customers to book directly, Viking maintains greater control over the customer experience and generates demand independently, rather than relying solely on third-party agencies. This strategy not only enhances profitability, but also strengthens the relationship between Viking and its customers.

Last but not least, Viking has shown its efficient capital allocation capabilities. The company takes advantage of economic downturns or periods of lower consumer demand to secure favorable conditions for its newbuilding program. By obtaining competitive prices and attractive financing during these times, Viking positions itself for future growth and expansion.

Growing operating performance

Viking delivered double-digit annual compounded growth in most of its operating metrics between 2017 and 2023, despite the negative impacts of the Covid-19 pandemic. However, the capacity passenger cruise days has increased from 3.39 billion in 2017 to nearly 6.48 billion in 2023. The total revenue, despite significant setbacks from 2020 to 2022, has experienced a 16.20% annual compounded growth, rising from $1.90 billion in 2017 to $4.70 billion in 2023. The adjusted Ebitda, following a similar trend, surged from $324.80 million to nearly $1.10 billion during the same period, with the adjusted Ebitda margin expanding from 26.30% to 35.50%.

The adjusted Ebitda, which is reported by companies, should be used instead of normal Ebitda because it accounts for all abnormal items, including losses and gains from private placement derivatives, gains on asset sales, financial currency income and stock-based compensation expenses. This performance metric is derived from Ebitda and further adjusted for non-cash gains and losses, currency fluctuations, stock-based compensation and other financial impacts.

Viking Holdings IPO: Analyzing Market Enthusiasm and Its Financial Outlook
Viking Holdings IPO: Analyzing Market Enthusiasm and Its Financial Outlook

Source: Viking's 10-K filing

Despite decent adjusted Ebitda, many investors worry about the huge net loss of nearly $1.86 billion it produced in 2023. However, looking closer, these losses were not big issues. The 2023 losses were caused mainly by the losses of private placement derivatives. This private placement derivatives were effectively the non-cash accounting losses, resulting from the increase in the fair value of its Series C preferred shares. However, before the IPO, those shares automatically converted to ordinary shares, and those private placement derivatives no longer exist. As a result, Viking would not incur those similar accounting losses in the future.

Highly leveraged balance sheet

What is a bit worrisome is the company's high leverage and negative equity. As of December, Viking's shareholders' equity was -$3.50 billion, driven by the negative retained losses. The majority of its retained losses were also caused by the losses of the private placement derivatives I described previously. The cash position was only $1.50 billion, while the total interest-bearing debt, including bank loans and secured and unsecured notes, amounted to more than $5.20 billion. With nearly $1.10 billion in adjusted Ebitda, the leverage ratio stayed at around 4.73. Although it sounds a bit high, Viking's leverage ratio is still much lower than the leverage ratios of its peers, including Carnival (NYSE:CCL) at 7.54 and Norwegian Cruise Line (NYSE:NCLH) at 7.40.

2023 Figures

Carnival

Norwegian Cruise Line

Viking

Adjusted EBITDA (Billion $)

4.23

1.86

1.10

Total Debt (Billion $)

31.89

13.77

5.20

Leverage Ratio

7.54

7.40

4.73

Expensively valued

At the current trading price, Viking is the most expensively valued cruise operator among the three companies. Viking is valued at nearly 15.80 times its Ebitda, the highest multiple compared to both Norwegian Cruise Line and Carnival. Norwegian Cruise Line has the lowest multiple of 10.92, while Carnival has a bit higher Ebitda multiple at 11.71.

Valuation

Carnival

Norwegian Cruise Line

Viking

Adjusted EBITDA (Billion $)

4.23

1.86

1.10

Enterprise Value (Billion $)

49.53

20.31

17.34

EV/EBITDA

11.71

10.92

15.76

Analysts project that Viking could generate $6.14 billion in revenue by 2025. If we assume it delivers around a 25% adjusted Ebitda margin at that time, its 2025 adjusted margin could reach $1.53 billion. Applying an Ebitda multiple of 11, Viking's enterprise value could reach $16.80 billion in the next two years. Using a discount rate of 8%, its enterprise value should be $14.40 billion, 17% lower than its current enterprise value of $17.34 billion.

From those valuations calculated and the comparison above, we can conclude Viking Holdings is quite expensive at the current price, driven by the current hype of the company's IPO. As a result, I would rather wait for better price before initiating a position in the company.

Conclusion

While Viking Holdings' recent IPO has garnered significant investor enthusiasm, leading to a substantial increase in its share price, the current valuation looks quite high. Despite strong market demand and post-IPO surge, the company's current valuation appears stretched when compared to its peers, with an Ebitda multiple significantly higher than those of Norwegian Cruise Line and Carnival. Additionally, the discounted future enterprise value calculation, factoring in expected revenue and Ebitda margin, reveals a notable discrepancy with the current valuation, suggesting overvaluation. Thus, I think investors should wait for a lower price before buying the stock.

This article first appeared on GuruFocus.