1035 Tuesday 8 January 2019

When we first covered Merlin Entertainments, their stock value was sitting at 321.90 and we suggested that the downturn it saw in October, may make it a candidate for inclusion into a portfolio. Since then, MERL.L saw a sharp increase in November to recover some its losses from the previous month, hitting 352.10, before dropping off again in December. But the stock has seen a sharp jump in value to start off 2019 and it’s for this reason and their recent developments that bring the stock back in our focus again.

 Background

Merlin Entertainments are widely known on the domestic market for their attractions that include Legoland, Madame Tussauds and The London Dungeons, as well as theme parks including Alton Towers, Thorpe Park and Chessington World of Adventures. While their UK based attractions remain a steady source of revenue for the company, it’s their global expansion, particularly within Asia, that catches the eye. Legoland now has 10 global locations, with more on the way, The Dungeon brand recently expanded into Shanghai along with the Peppa Pig World of Play and Madame Tussauds is now in 21 locations including the US, Australia and Japan. In total, Merlin Entertainment operates 128 attractions across 27 countries.

Recent Developments

Yesterday, news broke that a £205bn deal has been struck to open a new Legoland in Korea. The site will be within the island of Hajungdo in Chuncheon, with a near 24 million people live within a 2 hour drive. The deal is in conjunction with the Korean government who will be providing additional infrastructure to aid connections to the park, including the investment into a new bridge to the island. The park is due to open by 2022. The Korean location is in addition a further Legoland theme park that is currently under development in New York which is due to open in 2020. The existing Legoland parks will no doubt see extended footfalls and popularity as Warner Bros. Animation release the much anticipated Lego Movie 2 in February. The new movie will build on the phenomenal success of the original Lego Movie and subsequent Lego Batman Movie that were popular with both children and adults alike.

 Market Reaction

News of the Korean site had an immediate reaction on MERL.L yesterday and the stock closed the day’s trading up over 5%. Morgan Stanley reiterated their overweight recommendation on Merlin Entertainments yesterday and Peel Hunt placed a buy recommendation on the stock today, both of which set a target price of 450.00.

Whilst Merlin Entertainments has taken on a sizable amount of debt to fund their global expansion, their operating cash flow stemming from their existing sites comfortably covers this amount. And with this expansion in mind, especially within Asia, plus the realistic broker target prices, this stock remains high on our watch list.

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