City analysts are turning more gloomy on the near-term prospects of theme parks operator Merlin Entertainments (MERL).

HSBC has sharply cut its share price target from 450p to 315p as number crunchers at the banking group see a tougher spell for the business and the stock ahead.

HIGHER RETURNS COULD COME AT THE EXPENSE OF GROWTH IN THE LONG RUN

The author of the note, Joseph Thomas doesn’t believe that the longer term returns are compelling enough to justify the current valuation of 18.6 times this years earnings.  He highlights that the new developments have a different returns profile to the old, taking longer to mature.

Higher returns could come at the expense of growth, and while that could mean that the stock goes from a growth stock to one that returns cash to shareholders, the group is priced for more growth.

Investor are quick to take the hint, marking shares in Merlin more than 6% lower in early trade on Monday to 351.7p.

READ MORE ABOUT MERLIN HERE

HSBC is the second broker to downgrade its expectations for Madame Tussauds-owner Merlin since the company latest trading update on 3 May.

That update largely confirmed that trading was in-line with management expectations. The company also confirmed the sale of two Australian ski resorts for A$174m (£95m), deemed non-core assets.

POSITIVE MERLIN

This follows preliminary results for 2018, released on 28 February, that were above expectations. The company reported record numbers of visitors, up 1.4% at 67m, organic revenue growth of 5.2% to £1.65bn, and pre-tax profit of £285m, 4.9% up.

The company highlighted strong growth in worldwide leisure spending as disposable incomes increased. It also has big plans to expand into new markets, such as China.

But it has also had to balance other pressures, not least from extreme weather and terriorist threats dampening visitor numbers.

An increasing number of analysts now seem to be willing to challenge Merlin's optimism. While eight of the 13 analyst that cover the stock (according to Reuters Eikon data) remain positive on the investment story three are actively telling their clients to sell the stock.

That compares to zero at the start of 2019.

 

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Issue Date: 20 May 2019