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Merlin Entertainments - A mixed performance

George Salmon | 29 September 2016 | A A A
Merlin Entertainments - A mixed performance

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Our view:

Merlin is second only to Disney, as an operator of themed visitor attractions. It owns the UK's leading theme parks, Alton Towers, Chessington and Thorpe Park, plus LEGOLANDs around the world. The group also owns a series of smaller attractions within the Midway division, including Sea Life Centres and Madame Tussauds.

2015 was a difficult year for the group, after a terrible rollercoaster accident at Alton Towers. Visitor numbers at Alton Towers continue to be negatively impacted by the event, while lower city-centre tourism on the back of heightened security concerns is also serving to create a challenging near term backdrop.

However, the longer term prospects for the business look very good. With only a hundred and fifteen attractions in the portfolio, there are plenty of opportunities to open new ones around the world. There are LEGOLANDS in the pipeline around Asia and existing theme parks are gaining hotels, to raise spend per head.

With around two thirds of sales coming from outside of the UK, Merlin will be a beneficiary of the current weakness in sterling, and with the ability to open and expand attractions, year in year out, Merlin looks like one of the more dependable growth stories in the UK market.

Analysts are expecting earnings per share to grow by over 50% over the next three years , which should support increases in the dividend from a starting yield of around 1.6%. The shares currently trade on a PE ratio of 20.6x forward earnings.

Trading statement:

Merlin has this morning released a trading statement covering the 38 weeks to 17 September 2016, which includes the key trading period of July and August. With EBITDA margins at Midway attractions now set to be in the mid-thirties, lower than previously anticipated , the shares fell by 4.5 % this morning.

Merlin's reported revenues have benefited from the fall in sterling. Stripping out the effect of currency movements, group revenue has increased by 3.7% with like-for-like growth of 1.3%.

Resort Theme Parks has reported LFL revenue growth of 3%, although this is achieved against soft comparatives following the negative impact of the Smiler rollercoaster disaster at Alton Towers last year. The group has accepted full responsibility, received a £5m fine this week, and say that lessons have been learnt. Although trading over the summer has started to pick up, visitor numbers at Alton Towers remain some way below 2014 levels.

Within Midway Attractions, LFL revenue declined by 0.4%. Trading continues to be difficult in a number of key markets as wider security concerns affect both domestic and international visits. London in particular has been impacted, with the group yet to benefit from sterling weakness, which it had been hoped would boost overseas visitor numbers. Four new attractions have been opened in 2016, with a new brand, 'Little Big City' planned to pilot in Berlin next year.

LEGOLAND has delivered 2.2% LFL revenue growth, and continues to perform well against tough comparatives. The group is pleased with early trading at the 34 room 'Castle' hotel at LEGOLAND Deutschland. However, LEGOLAND Florida has delivered a softer performance as terrorism and the Zika virus weighs on the tourism market there.

Looking forward, the group expects trading at Alton Towers to continue to recover, and are confident in the prospects of all three divisions, despite the headwinds facing Midway in the short term. The group is making progress towards its 2020 strategic milestones which targets 2,000 new room openings, and 40 new attractions.

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.