Merlin’s less-than-thrilling ride, and Serco makes waves overseas

Thursday, May 23, 2019 - 11:05

"The markets are not a pretty sight on Thursday with stocks flashing red across the UK, Europe and parts of Asia," says Russ Mould, Investment Director at AJ Bell.

"Investors are spooked by how relations between the US and China seem to be deteriorating, spurred by the US putting Huawei Technologies on a trade blacklist.

"The FTSE 100 fell 0.6% to 7,293, also dragged down by several large cap stocks trading without the rights to their dividend including Bunzl, DCC and Imperial Brands."

Merlin Entertainments

"Merlin Entertainments' share price has been like a rollercoaster since it floated on the stock market in 2013 but the experience has been less of a thrill for investors than a ride on one of its attractions at Chessington World of Adventures or Thorpe Park.

"Activist investor and 9.3% shareholder ValueAct says enough is enough and it is now time for Merlin to take a different ride, namely become a privately-owned company.

"The rise in Merlin's share price following the publication of ValueAct's letter to Merlin chairman John Sunderland would suggest that investors believe the theme park operator will have no choice but to make significant changes to its business.

"ValueAct needs to woo some of the other large shareholders to get sufficient backing to encourage the board to put the business up for sale as its current stake may not have enough weight.

"Without getting other institutional investors to back ValueAct it seems unlikely that Merlin would actively seek a buyer to take it private as that would be quite a radical move.

"However, it does seem feasible that the public shaming by ValueAct could push Merlin to make changes to the structure of its business to prove that it can generate value for shareholders."

Serco

"It has been a long time since Serco was in the market's good books and today's acquisition of a US defence business certainly reminds investors that the once-giant outsourcing business is still alive.

"Chief executive Rupert Soames should be very pleased with how the deal has gone down as he's been working hard for the past five years to fix the business.

"Serco has been through the wars in recent times with banks and shareholders worried about its large debts and customers losing faith in the business.

"Full year results published in February showed 40% growth in underlying trading profit and free cash flow turned positive for the first time since 2014. That was a wake-up call for the market that Serco had regained its focus.

"Now the new US deal changes the shape of the group and means less reliance on the UK. This deal will give a boost to earnings which is another tick in the box for Soames. But strategically it is just as important as it increases Serco's percentage of revenue generated from the US from 20% to 26%.

"Having geographic diversification is very important at a time when there are big questions about the pace of new public sector contract awards in the UK amid Brexit chaos."

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.