14.55 Tuesday 30 October 2018

A brutal October is finally coming to an end, now investors are looking around the wreckage to find their next opportunity. Equitrade Capital has been taking a look at two domestic stocks that could provide such an opportunity as development both home and abroad present themselves for the firms.

Whitbread have recently sold one of their major assets and are looking to expand one of their others with the proceeds, while Merlin Entertainments are looking to the Far East to develop theirs. Here are our views on their recent developments and future outlooks.


Whitbread   (WTB.L ¦ 4,338.00p)

With brands including Premier Inn hotels and Beefeater restaurants within their portfolio, Whitbread PLC made the headlines this quarter by selling another one of their brands, Costa Coffee, to Coca Cola in a £3.9bn deal. As the deal was announced on 31st August, stock in WTB shot up as much as 18% on the day and while the price remained stable over the course of September, October took its toll. When reporting last week, Whitbread announced a 2.6% increase on revenue and a 2.5% rise in underlying profits with a 32.7p dividend which represented 4% growth on the previous year. Despite the good news, over half of the gains made from the Costa sale have been wiped off. Moving forwards, Whitbread have announced ambitious plans to use the recent cash injection that could inspire investors at their lower price. Firstly, Whitbread will focus as a hotel business and plan to hold over 100,000 rooms within the UK, up from the 74,000 it currently has, and additionally building a further 6,000 in Germany as they look to expand within Europe. Also under the hotel business umbrella, it was announced earlier this month that they would be opening ‘pod’ style chain known as Zip that would offer half sized rooms (8.5m2) at a price as low as £19 per night. The new hotels will be opened on the outskirts of cities and towns, with the first being in Cardiff in early 2019.


Merlin Entertainments   (MERL.L ¦ 321.80p)

Merlin is the owners of several household names within the attractions and resorts area including Legoland, Madame Tussauds and The Dungeons chain. While many venues are located within the UK, they own numerous others around the world. The past three months for Merlin has been rough with losses of around 20%.


As well as the general October slump, one of the detractors on the stock price was the poor earnings report this month. Legoland parks did not meet their revenue expectations which sent share values lower, however CEO Nick Varney sees this as a “blip” but went on to say "It's not a particularly terrible blip because the overall group is incredibly strong". To recover from the recent drop in value, Merlin plans on further global expansion and has opened a new Dungeon in Shanghai just in time for the Halloween rush. The new attraction is themed on the city’s legends and is the first of the chain opened in Asia with 10 others around the world. Also in Shanghai, Merlin opened a Peppa Pig World of Play recently. When asked about the new ventures, Mr Varney “China is a critical market because of its size and growth and because the Chinese consumer is really focused on experiences, and we’re good at experiences.”.


Closing Thoughts

Whilst bearing in mind that this is not a buy or sell recommendation, considering the losses incurred over the last 1-3 months alone and the scope for future growth, the companies are certainly worth consideration as an inclusion into a portfolio.


To get further analysis on these stocks and on the UK equity outlook, please call one of our brokers on 0121 454 0770 or enter your details on the form below.

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