Merlin Entertainments rollercoaster year should hit target

Theme parks group Merlin Entertainments confirmed it is likely to end its rollercoaster year on a stable footing with full year profit forecasts expected to meet lowered expectations despite the continued significant weakness at Alton Towers since the crash on its Smiler ride in June.

Strong trading from Legoland parks and in Asia offset challenging markets in London and Hong Kong, with the FTSE 100 company's resort theme parks unit, which includes Alton Towers, relieved to see year-on-year declines narrow in recent weeks, helped by better trading during the Halloween period's Scarefest.

This should mean the operating group remains on track to deliver underlying earnings before interest, tax, depreciation and amortisation (EBITDA) in line with previously reduced guidance of £40-45m from September.

Although some significant trading days still remain in the financial year, including peak season trading for parks in Australia and New Zealand, Merlin said trading across the whole business had continued at similar rates to those shown in its 17 September update.

At that time, revenues were reported to have grown at 3.8% at constant currencies in the first 36 weeks of the year, with like-for-like (LFL) sales growth of 0.3%.

Since then, an "excellent" Halloween period contributed to LFL revenue growth at Legoland parks remaining "strong", with continued growth in revenue per customer (RPC) expected to contribute to a strong margin performance for the year.

On the downside, the Midway Attractions unit endured continuing LFL revenue growth at lower levels, with a strong Asia contribution only partly offsetting the continuation of challenging markets in London, where the strength of sterling has hit visitors, and Hong Kong, which has suffered from restrictions on mainland Chinese visitors.

Analysts at Shore Capital said they suspected the Paris terror attacks had added to the negative impact on London visitors.

However, new attractions and accommodation opened across the group the last two years continued to perform well, Merlin said, and the outlook for new business "more broadly remains positive".

ShoreCap was impressed overall and saw scope for EBITDA margins to rise, although left its forecasts unchanged for now, with a 'buy' rating. The broker's core discounted cashflow (DCF) valuation of the group stands at 400p, with management's targets for a roll-out of 100 new Midway sites adding a further 86p or so per share, with plans for one new Legoland park opening every two or three years also each adding roughly 10p a share.

Fellow broker Numis said it had raised its full year forecast PBT to £249m to bring it into line with the new guidance. Numis added that it was retaining its 'hold' rating due to "continued euro weakness and some time to go until the shape of 2016 trading becomes apparent".

Panmure Gordon retained its forecasts, its 'buy' rating and 460p price target, saying the stock offers "long term structural growth, with significant recovery potential in FY2016".

Merlin shares were up 1.3% at 414.5p by 1035 GMT on Tuesday.