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Merlin Entertainments - a few growing pains

George Salmon | 2 August 2018 | A A A
Merlin Entertainments - a few growing pains

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Merlin Entertainments' half year profits have fallen as higher revenues fail to offset the greater cost of managing its expanding estate.

The shares fell 1.5% on the news.

The interim dividend rose 4.2% to 2.5p a share

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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, has dented recent 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 122 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 has been creeping up as well, although remains within the target range.

The shares offer a prospective yield of 2.1% next year and trade on a PE ratio of 18 times forward earnings, 10% behind their long run average.

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Trading details (divisional breakdown at constant exchange rates)

Putting aside the impact of accounting changes and currency headwinds, a slight increase in visitor numbers helped underlying revenue rise 4.5% to £694m. As usual, the group expects the majority of business to be done in the second half of the year.

Operating profits fell 14.3%, with currency movements responsible for around 60% of the drop, and higher depreciation and staff costs also playing a part.

Midway Attractions' £288m of revenue includes a 2.7% like-for-like drop, as the group suffered from the overhang of 2017 terrorist attacks in London, and the prolonged closure of an attraction in Shanghai. The high cost base meant profits fell 19.5% to £45m.

At LEGOLAND, like-for-like growth of 0.9%, plus the opening of new accommodation and LEGOLAND Japan, helped revenue rise 7.8% to £274m, Operating profits were £64m, with growth limited to 2.1% as the higher asset base led to greater depreciation.

Revenue from Merlin's Resort Theme Parks rose 9.7% to £130m. Growth was driven by higher accommodation revenue, the continued recovery at Alton Towers and favourable weather. That helped reduce operating losses from £21m to £17m.

The group spent £85m on the existing estate and £105m on new developments, bringing capital expenditure to £190m, down from £202m last year. With almost all of the group's free cash flow used to pay dividends, debt was unchanged at £1.2bn.

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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.