Merlin Entertainments: LEGOLAND moves into Asia

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Merlin Entertainments has seen trading in the first 36 weeks of 2015 come in line with revised expectations.  Resort Theme Parks (RTP) has been weak due to an accident at Alton Towers on 2nd June 2015.  However, LEGOLAND Parks has seen a strong performance and our rating remains at buy.

Taking a position in a share after a poor trading update is fraught with risk as “profits warnings often come in threes”.  We were willing to take the risk on Merlin Entertainments due its strong brands and attractive long-term prospects.

Full year expectations were revised lower on 27th June and the latest update has seen trading come in line with the new guidance.  Visitors have shunned the group’s Resort Theme Parks on the back of safety concerns.

The Resort Theme Parks division has taken a hit

We added Merlin Entertainments last week on account of the growth prospect for LEGOLAND Parks and Midway Attractions.  These two divisions have traded well with LEGLOLAND Parks seeing a particularly strong performance this year.

Merlin currently has only six LEGLOLAND Parks but in 2014 the division generated 31% of the company’s revenue.  The plan is to open a new LEGOLAND Park every 2-3 years and we are set to see three new sites open from 2016 to 2018.

Of the current six LEGOLAND Parks only one is in Asia (Malyasia) while two are in the United States and three of the sites in Europe.  As such there is significant potential to expand in Asia with three locations currently being pursued in China.

In the short to medium term the focus of investors will remain on how long it takes for trading conditions to improve.  This is hard to gauge given the continued negative press coverage of Alton Towers.

Looking at the valuation forecast and profits in 2015 is expected to be flat on 2014 due to the Resort Theme Park (RTP) headwind.  However, the P/E ratio for 2016 is forecast to be 18.6X and then falls to 16.6X in 2017.

The roll out of LEGOLAND Parks over the next three years sees the forecast P/E fall to an attractive 13.3X by 2019.  As such our view remains that Merlin Entertainments is high quality company attractive medium-term value.

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