Merlin Q3 Preview 2015-09-17

Merlin produces its Q3 trading update on Thursday.  The group’s shares are currently on a PE of c22x earnings.  The shares have pulled back in recent months following the accident at its Alton Towers theme park currently resting at around 380p, having peaked at around 460p in May this year.

The group has three major operating division:  Midway, the indoor attraction division (Madame Tussauds, SEA LIFE, The Eye, The Dungeons,  LEGOLAND Discovery Centres and Shrek’s Adventure), LEGOLAND Parks and Resort Theme Parks (Alton Towers, Thorpe Park, Chessington World of Adventures, Warwick Castle, Gardaland (Italy), and Heide Park (Germany).

Sites (as of June 2015)

*1^st site opened in London 1 July 2015

The biggest news for Merlin this year was the accident that occurred at its Alton Towers theme park.  The group has stated that this will likely subdue earnings at the group’s Resort Theme Park segment going into H2, and at the group’s half year it found that LfL’s at the RTP segment were down 2%.  This fall has been mitigated somewhat by strong Like for Like growth of 6% at the group’s LEGOLAND Theme Parks and 2.9% at the Midway attractions division.

The Group has suggested that the Alton Towers accident means profits at the RTP segment would likely be £40-£60m lower this year than last year when the group saw £87m EBITDA and £60m operating profit at the segment, accounting for 17.3% of the group’s total operating profit.   The group predicts that the effects of the accident could last between 6-18 months, and have warned that next year’s trading may also be impacted.  4 of the 6 theme parks in the RTP segment are in the UK and the group has said that Thorpe Park has also seen a fall in trading, however the group suggested it will get back to the c£87m EBITDA level for the division by 2017

Midway:

• Midway is the largest segment, last year making 48,1% of operating profit, and consists of some 90 sites worldwide.
• LfLs at the Midway segment at the half year were up 2.9% with revenue up 7.9% on a constant currency basis as the group continues to expand this segment.
• The group opened 5 new Midway attractions in H1, with 100 potential further sites identified. Target ROIC at a new attraction is 20%, on a c£5-8m spend per site.
• The group is typically targeting opening ‘clusters’ of sites where there are cross-selling and operational synergies to be had.
• Five of seven sites planned sites for FY17 had already been identified at the half year
• The group opened its first Shrek’s Adventure attraction in July this year, and has the rights to open up to 6 sites under the current agreement with Dreamworks (who get mid-single digit royalties) with the group hinting at a second site potentially in the USA.  The group has a working relationship with Dreamworks, so 6 sites isn’t necessarily a ceiling.
• The Midway segment made 48.1% of the group’s operating profit in FY2014,
• Midway trading in Asia has been mixed with the group’s Thai operations improving following unrest in the nation, but Hong Kong suffering due to travel restrictions imposed by China.
• London trading has been impacted by a dropping off in European travel to the UK as a result of the strong pound. The group is pushing domestic marketing which it hopes will offset the drop in European visitor numbers, and take domestic market share.

LEGOLAND Theme Parks and Resort Theme Parks:

• The group continues to roll out its LEGOLAND Theme Parks, with openings in Dubai , Japan and Korea due to open in 2016, 2017 and 2018 respectively.
• The group has been rolling out accommodation at its theme parks, targeting a 20% ROIC from both accommodation revenue and increased park visitation.
• Hotels in Alton Towers and LEGOLAND Florida were opened in H1, with a 100 room hotel in Gardaland set for 2016.
• The Half year numbers at the LEGOLAND Parks saw strong LfL growth of 6% despite very tough comps last year as a result of the release of the Lego Movie.
• Momentum at the Resort Theme Parks as a result of the recent accident was interrupted, with Alton Towers forced to close for a week and rides at other parks closed while new safety measures are put in place.

Conclusion:

The group’s shares remain highly priced at c22x consensus FY2015 earnings, despite the recent drop in the wake of the Alton Towers accident, which will impact its largely UK based Resort Theme Parks.   That said, the group does have significant roll out potential at both its Midway and LEGOLAND Theme Park divisions, and with three new Lego movies scheduled for release in 2016, 2017 and 2018, the LEGO brand could remain buoyant for some time.   Execution risk is still there but momentum at the majority of the group’s operations seems to be strong.