Why Merlin Entertainments Plc Isn’t For Me

Investors in Merlin Entertainments plc could have an exciting ride – up and down!

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

“It is far better to invest in a wonderful company at a fair price, than a fair company at a wonderful price”. So said investment sage Warren Buffett.

Hot on the heels of Royal Mail‘s float, Merlin Entertainments’ IPO has sharply divided opinion. I believe Merlin is a wonderful company: at least, one with great growth prospects. But whether it’s being sold at a fair price — well, that’s another story.

A wonderful company

Merlin is a diversified play on discretionary family leisure expenditure, operating 99 attractions in 22 countries. It’s Europe’s largest operator of tourist attractions and the second-largest worldwide.  It has three divisions: Midway, which encompasses indoor visitor attractions such as Madame Tussauds, the London Eye, and SEA LIFE marine centres; LEGOLAND parks pitched at families with young children; and leisure parks such as Alton Towers, Thorpe Park and Warwick Castle.

40% of revenues come from the UK, with international sales split across Europe (26%), North America (20%) and Asia Pacific (14%). The current owners, LEGO-owner KIRKBI and private equity firms, are selling down 25-30% with KIRKBI retaining a near 30% strategic stake. £200m of new shares will help reduce a big debt pile.

Attractions

The business is as filled with attractions for investors as Thorpe Park is for teenagers. Highlights include:

  • Iconic brands with global cachet;
  • Great growth prospects in Asia Pacific;
  • Scale and corporate expertise to roll the formula out at low cost and risk;
  • Synergies from ‘clustering’ compatible attractions;
  • Good management: executives who built the business from the ground up anchored by top-notch non-execs.

Those business strengths, together with acquisitions, have delivered rapid growth in bottom-line results, turning an £80m loss in 2008 to a £76m profit in 2012 against a difficult economic backdrop. But the business consumes vast quantities of maintenance and growth capex, and debt has built to £1.4bn against £800m of net assets.

A fair price?

The valuation is the catch. The £3bn capitalisation implies, on paper, a historic P/E of around 40. The City has steered valuations on an EV/EBITDA basis, which overlooks Merlin’s big debts. Struggling to find the investment case, I’ve concluded that anticipated improvement in EBITDA from £346m in 2012 to £380m and reduced interest charges could get to a prospective P/E of 20, and dividend yield of around 1%.

Gearing — operational and financial — can generate big leaps in earnings. But it cuts both ways. Merlin’s high debt, cash-hungry capex and economically-sensitive revenues don’t leave much margin of safety at this valuation. There are better growth companies.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Tony does not own any shares mentioned in this article.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »