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Investment Times

New faces, ongoing opportunities

| 6 April 2015 | A A A
New faces, ongoing opportunities

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Three recently floated companies which could be worthy of consideration.

Merlin Entertainments

A little bit of magic

Merlin Entertainments, one of my five shares to watch in 2015, has got off to a wizard start so far this year, rising 10%. This leaves it over 40% ahead of its November 2013 listing price of 315p.

Merlin is second only to Disney in the visitor attractions industry. Its brands range from individual theme parks like Alton Towers, to global attractions like Legoland and Madam Tussauds. Creating attractions can involve a lot of capital, as anyone who backed EuroDisney will remember ruefully. That raises risk and slows the pace of expansion, so Merlin builds its assets and then sells the property to other investors, having signed long-term leases to use the locations. This releases a lot of the capital, allowing Merlin to move onto new opportunities.

Merlin currently has over 100 attractions across 23 nations. Its last results showed sales growth of 10%, profits up 13% and a double-digit return on expenditure. What I like about Merlin is its potential to keep doing this. There are a large number of locations capable of supporting an attraction, but where Merlin has yet to trade, so organic growth could continue for a long time to come.

Visitor attractions generate cash up front; you pay to walk in, you probably keep paying to walk around, especially if you've taken the kids. As its estate grows, the potential for cash generation grows with it and Merlin has a pipeline of new attractions stretching years into the future. Merlin is not the cheapest stock, trading on a prospective price-to-earnings ratio (PE) of 23 times earnings. Visible growth is something I always think is worth paying for and that pipeline of growth is worth a lot in my eyes.

  • First day of trading: 8 November 2013
  • Market cap: £4.5bn
  • Index: FTSE 250

Merlin Entertainments share charts, prices and research

Pets at Home

Fully house-trained

Flotations don't always go to plan, and Pets at Home is a case in point. The company is far and away the market leader in its sector, but it floated at a time when supermarket price wars were breaking out and investors fretted that pet food, Pets at Home's most important revenue stream, would become part of the battleground. The fears were misplaced - having initially fallen after launch, the shares have clawed their way back up to stand close to the price at which they floated.

Growth in store numbers and in-store vets

Source: Pets at Home plc Annual Report, 2014

The company's January trading statement revealed like-for-like revenue growth of 4.1%, driven by strength in Advanced Nutrition, (why charge £20 for dog food, when you could charge £50?), Health & Hygiene and e-commerce. What I find most interesting about Pets at Home though, is their cautious growth strategy.

The company has almost 400 stores, and sees the potential to grow this to over 500. It has also opened over 300 veterinary practices. These are often in-store and there is potential to open over 400 more. Grooming too is an attractive market - Pets at Home has opened 160 'Groom Rooms' in its stores, with the scope to increase this number in future.

It all adds up to years of organic growth potential. Pets at Home should be capable of growing for many years to come, just by filling in the blank spaces on the map where it does not currently trade. The format ought to cross borders too, so long before the UK market is saturated, Pets at Home is likely to become Pets Abroad. The shares trade on a prospective PE of 16 (using forecasts for next March), and currently offers a prospective yield of 2.3% (variable and not guaranteed).

  • First day of trading: 12 March 2014
  • Market cap: £1.26bn
  • Index: FTSE 250

Pets at Home share charts, prices and research

Jimmy Choo

Do you have them in a size nine?

How much would you spend on a pair of shoes? If you have been buying Jimmy Choos, the price starts at “But you'll only wear them once!” and goes up to “I need to sit down”. These are not ordinary shoes - they are shoes fashionistas obsess about, and will pay through the toes to get their hands (and feet) on.

Revenue by region

Source: Jimmy Choo plc preliminary results, 19.03.15

The brand sells through 125 directly owned stores around the world, earning most of its sales from the core-shoe ranges, plus accessories like handbags and purses. You can't open a Choo shop in any old location, but even so, 125 stores is barely scratching the surface. Some of the virgin territory is covered by wholesale and joint-venture channels, but the organic growth potential is large.

Of course, having an expensive product is no guarantee of success. What caught my eye with Jimmy Choo is not the shoes, but the people behind the business. Benckiser is a name with which many investors will be familiar. Under the guidance of Bart Becht, consumer goods company Reckitt Benckiser created billions of shareholder value. The Benckiser family owns 70% of Jimmy Choo plc and the board of Jimmy Choo consists of the family's executive team, including Bart Becht. Because of the clout of the Benckiser family, the board of Jimmy Choo is a far more heavyweight affair than would normally be associated with a £636m company.

It is this combination of an iconic brand, a board brimming with talent and an immature estate that appeals to me. Recent results showed underlying sales rose by 12%, with nine stores opening last year. The business is forecast to grow sales at around 10% per annum, though the pace of store openings will decide much of this. Jimmy Choo target 10-15 openings per year, with Asian locations a key target.

The stock trades on a slightly 'luxurious' rating of 22 times current consensus earnings per share, falling to 18 times next year. Not cheap, but then, neither are the shoes.

  • First day of trading: 17 October 2014
  • Market cap: £636m
  • Index: FTSE 250

Jimmy Choo share charts, prices and research

References to specific securities should not be construed as a recommendation to buy and sell these securities either explicitly or implicitly, or an opinion on present or future value of the securities. Past performance is not a guide to future returns. Remember investments can fall in value as well as rise.

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