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Questor: Merlin shares have had their thrills and spills but now is the time to buy
Stock market life has been a rollercoaster for Merlin Entertainments. This November will mark the fifth anniversary of the listing of the Legoland and Madame Tussauds attractions group, or the “global leader in location-based family entertainment” as the corporate blurb stiffly puts it.
Priced at 315p back then, the shares almost dropped below that level in February. Having touched an all-time high of 537p only last June, the decline has been as breathtaking as the 100ft “beyond vertical” Saw movie-themed ride that thrillseekers flock to Merlin’s Thorpe Park venue in Surrey to experience.
However, Merlin appears to be weaving its magic again. The shares are at their highest point since last October’s profit warning, when the company said the terror attacks in Westminster and Borough Market were putting visitors off London, and poor weather had dampened trade further afield.
It helped that the chief executive, Nick Varney, was able to meet 2017 profit forecasts and despite the washout still make more money than in 2016. That was the year the company was fined £5m for a horrifying crash on the Smiler ride at Alton Towers. Investors are reminded of the long-term appeal of the world’s second-biggest visitor attractions group behind Walt Disney – but also the day-to-day risks it runs.
This summer looks better already. After Britain’s hottest May on record, forecasters predict the good weather to continue over the next three months. Domestic trade is important but Merlin has rapidly internationalised to operate more than 120 attractions, 18 hotels and six holiday villages in 25 countries.
Sentiment has further improved after a recent analyst trip. Merlin gave more colour around three new attractions it is working on. Its first Bear Grylls-branded climbing adventure, aimed at older teens, will open later this year in Birmingham. Peppa Pig’s play area will debut in Shanghai with four more sites in the pipeline, and Little Big City, a new take on the model village, is coming first to Beijing.
All three are designed to show off “Merlin Magic Making”, the in-house creative team that develops new ideas. Analysts at Deutsche Bank say it will take up to two years to assess how viable these formats are and even longer before they move the financial dial. Of its existing formats, Questor reckons that Tussauds must work hard to maintain its appeal, but Legoland is clearly flying.
The original plastic-brick themed park opened 50 years ago in Billund, Denmark. The brand was Merlin’s star performer, with sales rising by 18pc last year, helped by a new Japanese venue and the popularity of rides such as the martial-arts-themed Ninjago World. Legoland New York is due to open in 2020 and talks are under way for outlets in China and South Korea.
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Packing more into its parks is vital if Merlin hopes to carry on exciting kids who might be just as happy slumped on the sofa staring at a screen. It also needs to give parents plenty of reasons to book a room, not just a ride. Varney’s reaction to tough trading was to redirect funds towards building more accommodation at existing sites. His opening programme is still busy, with £60m to £70m per year earmarked for new so-called “midway” medium-sized attractions.
Overall, this brisk activity will boost capital expenditure this year to a forecast £390m, from £332m. Hargreaves Lansdown, the broker, sounded a note of caution, flagging Merlin’s fixed cost base, including rising staff costs for its 29,000-strong peak-season workforce, and net debt creeping higher. The stronger pound also makes life a little harder.
Merlin has never been known for being cheap – the standard price for an annual pass to its attractions is £179 per person – but there are few challengers in its market and demographic trends are on its side. This year is about stabilising and investing after a rocky period.
What makes the stock attractive is the step-up in profitability that is due in 2019. Merlin shares trade on 16 times next year’s forecast earnings. Thrillseekers could easily find somewhere riskier to stash their cash but for everyone else Merlin is worth buying.
Questor says: buy
Ticker: MERL
Share price at close: 379.5p