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Merlin Entertainments - Trading in line with expectations

Steve Clayton | 17 September 2015 | A A A
Merlin Entertainments - Trading in line with expectations

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Merlin have released their end-summer trading statement, covering the 36 weeks to September 5, which is broadly in line with the earlier guidance issued after the tragic accident at the Alton Towers theme park in early summer. Trading in the Midway Attractions (Sealife Centres, Madame Tussauds, Shrek's Adventure! And the Dungeons) has been encouraging, whilst the Legoland Parks have performed especially strongly. But the Resort Theme Parks division has seen significant weakness following the accident. Overall the group delivered 3.8% sales growth at constant currency, but the weaker euro left reported sales up just 2.2%. Within this, the group delivered overall Like-for-like sales growth of 0.3%, with Midway up 2.6%, Legoland up 6.7% and the Resort Theme Parks suffering an 11.4% LFL sales decline.

The shares have opened fractionally lower following the trading update.

Our view:

The financial consequences of the tragic accident at Alton Towers have been greater than expected. Alton Towers is the flagship Resort and the crash came just ahead of the peak summer season. Visitor attendances were affected throughout the summer, exacerbated by awful August weather in the UK. Merlin sharply reduced their divisional expectations for the year. A refinancing of the group's debts has cut the finance charges, partially offsetting the lower theme park earnings. So profits will be flat this year, rather than falling, despite the tragedy.

We do not expect there to be a significant long term reduction in Merlin's intrinsic value as a result of the Alton Towers accident. No other Merlin assets carry the Alton Towers brand, so the prospect of contagion is limited.

Merlin is driven by global consumer spending; it has attractive assets, and their brands have shown great longevity; Madame Tussauds, has been trading for over 200 years, and now that the velvet ropes have been taken away, it's enjoying a new lease of life as the world's best place to take celebrity "selfies". Attractions can be rolled out to new locations and the group should be capable of expanding the portfolio for many years.

Sixty percent or so of revenues are earned outside the UK. At home, Merlin operates the larger UK theme parks, plus the smaller, Midway group of attractions. The Midway brands have been exported internationally, but perhaps the company's greatest asset is their right to operate Legoland parks.

These days, Merlin is second only to Disney as an operator of visitor attractions, with over a billion pounds a year of revenues. The group has over 100 attractions, spread across four continents and is well placed to capitalise on the stronger consumer spending that accompanies global economic growth.

Growth comes from opening new locations, adding new rides and features to existing Attractions, increasing visitors through the turnstiles and boosting spend per head. The cost of growth is contained by leasing their main sites to property investors, so that Merlin only actually own the branded assets, but have long term leases over their operating locations. We like the model, and the family behind Lego have clearly given it a big vote of confidence by swapping their parks for a stake in Merlin.

There seems plenty of potential for rolling out the estate internationally. Put simply, with just over a hundred operating locations around the world, only a small percentage of the world's population go anywhere near a Merlin property each year. The brands are successful, and should be able to support many more locations. In the near term, growth will be held back by reduced UK Resort Theme Parks performance, but we expect underlying trading to rebuild over time.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.