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Merlin Entertainments - The magic's still there

Nicholas Hyett | 1 March 2018 | A A A
Merlin Entertainments - The magic's still there

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Merlin saw reported revenues rise 11.6% in 2017 to £1.6bn, boosted by a combination of new attractions and currency movements, with underlying revenues up 0.7%. Operating profit rose 6.8% to £323m.

The group announced a final dividend of 5p per share, taking the full year payment to 7.4p, a 4.2% increase on the previous year.

The shares rose 9.4% in early trading.

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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 global network of city centre attractions, including Sea Life Centres and Madame Tussauds.

The combination of poor weather and terrorist attacks in London, one of Merlin's most important markets, dented 2017 numbers. But demand for what Merlin does hasn't gone away.

New openings continue to drive headline revenue growth and the LEGOLAND business has actually seen like-for-like (LFL) trends improve on last year. Trading in the Midway attractions has also remained strong outside London and North America.

While visitor numbers will wax and wane according to global events, we feel advancing global incomes and favourable demographics should see appetite for Merlin's attractions trend upwards in the long term. Aquariums have enduring appeal, the selfie has done wonders for Madame Tussauds, while the success of LEGOLAND Japan is just another indicator of how good that brand is.

With 124 attractions worldwide, there's some way to go before Merlin bumps against the side of the tank. LEGOLAND New York is set to open in 2020 and the group has shown itself willing to flex plans based on circumstances. The success of the accommodation offer has made it a focus going forwards.

However, expansion means capital expenditure is set to rise, as will the fixed cost base, so the plans are not without risk. Net debt is creeping up as well, although remains within the target range.

Prior to the third quarter trading update the shares offered a prospective yield of 2.3% and traded on a PE ratio of 15.8 times forward earnings, 21.5% behind their long run average.

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Full Year Results

Total visitor numbers rose 3.5% in 2017 to 66m, boosted by the opening of six Midway attractions, LEGOLAND Japan and 383 additional hotel rooms. Expansion is set to continue next year, with plans to open nine more Midway attractions and a further 644 hotel rooms.

The Midway business, which includes smaller attractions such Madame Tussauds and SEA LIFE, saw revenues rise 5.7% in the year to £656m thanks to currency movements and the effect of new attractions. However, poor trading in London following terror attacks saw revenues at existing attractions fall 1.2%. Divisional profits fell 5% to £152m.

At £609m, LEGOLAND delivered a 25.1% increase in revenues, up 4.7% at existing attractions once currency effects are excluded. Headline growth was driven by the opening of LEGOLAND Japan but also the addition of hotel rooms to existing parks. Profits rose 19% to £191m.

A 1.9% decline in revenues from existing attractions saw the Resort Theme Parks division post a 1.3% decline in profits, which now stand at £36m. An increased terrorist threat level in the UK and poor weather in Europe both negatively impacted results, although currency movements meant the division manged to increase reported revenues by 3.2% to £329m.

Net debt rose 13% over the year to £1.2bn, which now represents 2.4 times EBITDA -a measure of cash profits (2016: 2.3 times). Total capital expenditure for the year was £336m, with £159m spent on existing attractions and £177m on new developments.

Merlin says current trading is in line with expectations, while underlying expectations for 2018 remain positive.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.