Legoland and Alton Towers operator Merlin Entertainments (MERL) has suffered a 4% drop to 476.3p as Berenberg analyst Owen Shirley recommends investors ditch the stock.

He has downgraded from ‘hold’ to ‘sell’ and believes the shares could fall by about 25% over the next 12 months to 375p.

DECLINE IN VISITOR NUMBERS

Shirley dismisses excuses of weak tourism numbers to the UK for Merlin’s lower like-for-like performance in the first nine months of 2016. He highlights overall holiday visits having increased 11% year-on-year in the fourth quarter.

‘Our analysis suggests that, on a same-site basis, Midway visitation has been declining since the end of 2013,’ says the analyst.

‘Even more of a concern is the fact that Merlin’s ability to offset declining visitation with pricing appears to be diminishing.’

LEGOLAND STRUGGLES WITH COMPETITION

Legoland is also under fire as increasingly tough competition has resulted in barely any like-for-like growth from Merlin in the third quarter and negative growth in the fourth quarter.

Shirley has scaled back like-for-like growth forecasts for Legoland from 7% to 5%. That’s despite there being a new Lego film at the cinema which could drive more visitors to the branded theme parks, such as the situation when the previous film came out in 2014.

‘The Lego Batman Movie is unlikely to have as great an impact on park attendance as the 2014 film, given that opening weekend box office sales in the US were c25% lower for the recent film than for 2014’s The Lego Movie,’ he says.

‘We also believe the downside risk into the first quarter is significant with only California, Malaysia and the struggling Florida park contributing for most of the period.’

If you looking for further evidence to back up Shirley’s ‘sell’ stance, he flags Merlin falling short of its return on invested capital target in two of the last four years.

The analyst also says extra spending requirements in 2017 will mean the company barely generates any free cash flow once taking into account capital expenditure.


Issue Date: 16 Mar 2017