Wednesday newspaper share tips: Conflicting views on Merlin Entertainments

All eyes were on Merlin Entertainments in the papers on Wednesday.

The theme parks group confirmed on Tuesday 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 EBITDA in line with previously reduced guidance of £40m to 45m from September.

The Times’ Tempus was optimistic about the company as it rated it a ‘long term buy’.

It noted that analysts are looking for a return to growth next year in all areas of the group, driven by Legoland.

The tipster said that part of the business achieved continuing growth in spending per customer and margins, and Merlin is investing in it further in the future.

“A park is being built in Dubai, under a less expensive management contract model. Two are planned in Japan and South Korea and another is likely to be built in Shanghai, should a suitable site be found.”

While Tempus said it believes pre-tax profits won’t change much from last year’s £249m, it forecast it should rise by 10% next year.

It said shares are not cheap at the moment, but worth taking a long-term look at.

The Telegraph’s Questor agreed the shares look expensive adding it believed growth is slowing down.

It cited the Alton Towers accident and highlighted that the company has been hit by it, with trading in its Resort Theme Park business “significantly below” last year.

“The concern is that any return to normal trading could take far longer than expected.”

It also said it has a reputation issue to overcome and may not be able to recoup its costs.

“Merlin spent £18m on The Smiler, and it is difficult to see how they can now recoup their costs or use the ride to attract customers, even though an internal investigation found the crash was caused by human error and there were no technical or mechanical problems with the ride itself.”

Despite management saying trading was in line with expectations, Questor believed that was to be expected as just over two months ago its guidance was reduced.

With shares currently at 22 times earnings, the risk is that if it proves tricky to return to growth and if shares moved to 15 times earnings that would be a fall of more than 30%, and advised traders to ‘avoid’.