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Morgan Stanley sees big potential – but not everyone agrees
Thursday 11 May 2017 Author: Lisa-Marie Janes

Legoland owner Merlin Entertainments (MERL) is trading at all-time highs above 500p, driven by a recent bullish research note from investment bank Morgan Stanley which says a plan to add themed hotels to its parks are ‘underappreciated’ in both their profitability and scale.

Other analysts are more sceptical. We even note chief new opening officer John Jakobsen sold more than £750,000 worth of stock in late April; not exactly a vote of confidence in the business.

The bull case

Merlin operates well-known UK attractions including Alton Towers, Chessington and Thorpe Park.

With a target price of 580p, Morgan Stanley analyst Jamie Rollo helped sparked interest in the stock on 26 April as he asserted Merlin’s earnings could jump by 26% over the next five years.

He says: ‘Themed hotels provide an immersive experience for families and premium revenues to standard hotel offerings.’

According to his analysis, the company could generate £340 revenue per room per night – three to four times higher than the market average.

The firm has an ambitious rollout strategy as it aims to open 40 new Midway sites, four Legoland parks and 2,000 hotel rooms by 2020.

Rollo says this should drive mid to high single-digit percentage growth in annual earnings before interest, tax, depreciation and amortisation.

He reckons that if Merlin exceeds these rollout targets, the share price could rally to £10 by 2022, but notes there are existing headwinds that threaten its performance. These include geopolitical risks and potential terrorist attacks.

The company’s reputation was also damaged by the Smiler rollercoaster crash at Alton Towers in June 2015.

The bear case

Berenberg analyst Owen Shirley has a ‘sell’ recommendation and a bearish price target of 375p. He recently cut like-for-like growth forecasts.

Shirley is cynical about the company blaming a weak tourism market for its underwhelming performance in 2016, noting overall holiday visits to the UK rose 11% year-on-year in the fourth quarter.

He also fears the Legoland parks, which he concedes have enjoyed an ‘exceptional’ historical performance, are running out of steam and
notes free cash flow generated by the business remains negligible.

As around two-thirds of Merlin’s business is overseas, another potential risk is a recovery in the strength of sterling which would act as a headwind to earnings when translated from other currencies for accounting purposes. (LMJ)

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