HSBC initiates Merlin Entertainments at 'buy'

HSBC initiated Merlin Entertainments at ‘buy’ and a target price of 530p on Monday, saying the theme park owner remains “high growth, well-diversified and scalable”.

The bank said following a weak summer it believes there is potential for strong recovery in Merlin's Midway attractions - including Legoland and Madame Tussauds - and the group's Resort Theme Parks - which include Alton Towers and Thorpe Park - in 2017.

A strong pound and worries over terrorist activity in Europe have hurt Merlin’s Midway business in London, HSBC noted.

HSBC estimates 30% of Merlin’s Midway business is in London where it calculates like-for-like sales have been down about 7% compared to a 5% increase in the rest of Europe.

However, HSBC believes the London business will turnaround in 2017 as a weaker post-Brexit pound attracts more tourists.

“London trends should benefit from a weak currency in 2017 and so far we have seen an increase in inbound UK numbers and expenditure but the data suggest these figures relate to friends and family visits.

“We expect the next data to pick up will be tourist visits into the UK, which would benefit Merlin’s attractions.”

On the group’s theme parks, HSBC thinks recovery is happening faster than anticipated. Like-for-like sales were down 18.1% in the second half of 2015 and improved to a 10.2% decline in the first half of 2016. HSBC estimates a 19% increase in like-for-like sales in the third quarter, compared to a 21% decrease the same period last year.

“We would expect this pace of recovery to continue into 2017,” HSBC said.

“Together with cost savings, new attractions, accommodation and a rise in the “staycation”, we forecast Resort Theme Parks earnings before interest, tax, depreciation and amortisation (EBITDA) to return to 2014 levels of £87m by 2017 rather than the market’s expectation of 2018.”

HSBC said Merlin is one the most diversified companies in the sector by geography and exposure to tourist and domestic customers. The company also generates enough cash to organically double earnings per share over the next five years, the bank added.

Shares rose 1.07% to 444.30p at 0927 BST.