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Merlin Entertainments - Trading in-line

Steve Clayton | 1 December 2015 | A A A
Merlin Entertainments - Trading in-line

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With the summer season over and its financial year end approaching, Merlin Entertainments has issued a trading update. Overall, the business is performing as expected, given heavily revised expectations after the tragic rollercoaster crash at Alton Towers at the start of the summer season.

The shares opened around 1.4% higher on the news.

One of our Five Shares to Watch in 2015, Merlin has held its own, relative to the market, despite the severe costs of the accident. Trading at Alton Towers has picked up with the Halloween season, whilst Legolands have traded well throughout, with rising spend per head aiding margins. The Midway attractions group (SeaLife Centres, Madame Tussauds, Dungeons and Shrek) has seen variable trading by location. Recently opened attractions have traded well.

Full year expectations for the group as a whole are unchanged, although the full year result could still be affected by peak trading in Australia and New Zealand which occurs around Christmas.

Our View:

The tragic accident at Alton Towers came just ahead of the peak summer season and severely impacted visitor attendances, 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 brands like Madame Tussauds have shown great longevity. (It's currently enjoying a new lease of life as the world's best place to take celebrity "selfies").

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.

In October, Merlin announced plans to open a LEGOLAND park in Shanghai, plus a portfolio of Midway attractions, as part of the Chinese President's state visit to the UK.

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's attractions are spread across four continents and Merlin is well placed to capitalise on global economic growth.

Growth comes from new locations, adding new rides and features, 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. 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 next year or two, the pace of recovery in the Theme Parks division will be crucial, but the longer term outlook seems unaffected.

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.