Berenberg starts Merlin Entertainments at 'hold'

Berenberg initiated coverage of Merlin Entertainments at ‘hold’ with a 440p price target, saying the stock is “priced to perfection”.

“We like the company, are impressed with its growth over the last 10 years and believe its strategy will continue to add scale to the business. However, we struggle to see how Merlin can materially outperform current expectations, with the new-attractions roll-out well guided and many sites apparently operating at elevated performance levels.”

Berenberg said that with free cash flow likely to remain muted for the foreseeable future, there is limited near-term scope for a re-rating, hence the ‘hold’ rating.

The bank said Merlin has driven impressive historical growth in its Midway division, with like-for-like growth averaging 5.5% from 2009-15. However, adjusting for the London Olympics in 2012, LFL has been trending down since 2010, and turned negative in the nine months year-to-date.

Management attributed this to weak tourism into London and guided expectations for 2017/18 down at the third quarter results. While weaker sterling could stimulate visits to London, signs of a recovery are yet to be seen and, without one, LFL growth next year could fall short again, Berenberg said.

It also pointed out that LFL growth in the Legoland Parks division has trended down to just 2.2% in the nine months year-to-date.

Berenberg noted the accident at Alton Towers last year, which led to a big drop across the resort theme parks. It said that while there are signs of recovery, there is some risk that the continued media spotlight on Alton Towers could weigh on the time it takes for theme parks to recover.

At 0900 GMT, Merlin shares were down 1.3% to 443.96p.