Merlin Entertainments saw total revenue grow 4.7% in the first three quarters of the year, excluding currency movements.
However, that was driven primarily by new openings, with like-for-like (LFL) sales up just 1.4%, despite a strong performance from Resort Theme Parks as LEGOLAND LFLs also turned negative.
The shares fell 7.2% in early trading.
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.
New openings sprinkled around the world continue to drive headline revenue growth, but under the surface things aren't quite so rosy. The Midway business has been struggling for a while, largely because of terrorist attacks on London, but LEGOLAND has now joined the slump. With costs on the rise, that raises some really concerns about the outlook for margins.
Management still think they're on course to meet full year expectations, and LEGOLAND should benefit from LEGO Movie 2 hitting cinemas early next year. But we'll be watching full year numbers closely nonetheless.
Still, it's easy to get caught up in short term results, and demand for what Merlin does hasn't gone away. 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 127 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 2.2% next year, and trade on a PE ratio of 16.9 times forward earnings, some way behind their long run average. That valuation assumes there's still years of growth ahead, but we feel things could get worse before they get better.
Third quarter trading update
New openings so far this year include 644 bedrooms across the Californian, German and Japanese LEGOLAND parks and six new Midway attractions. The group is seeing early signs of a recovery in the London tourism market following last year's terrorist attacks.
Resort Theme Parks delivered 9% revenue growth, with 8.3% LFL growth. The division benefitted from warm weather over the summer, with the launch of new attractions and benefit of additional rooms also boosting results.
LFL revenues fell 0.7% in Midway, the city centre attractions business. That reflects the still tough operating environment in London, Midway's largest market, although recent weeks have started to see a return to growth.
LEGOLAND saw organic revenue rise 6.4%, thanks to the opening of LEGOLAND Japan and new hotel rooms. Unfortunately LFL revenues were down 0.3%, reflecting the lack of a LEGO movie this year and marketing challenges at one park.
Going forwards cost pressures from rising wages and increased business rates remain a significant headwind - although this will be partially offset by cost saving plans. As a result Merlin expect full year results to be in line with current market expectations.
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