Overview
Merlin Entertainments plc (MERL) is a Poole, UK-based entertainment company. The group operates midway attractions and theme parks. Its midway attractions include indoor attractions in the city centres, Theme parks, and resorts. The company’s theme parks including LEGOLAND parks and resort theme parks offer outdoor attractions such as rides, accommodation, shows, and interactive experiences to teenagers, families, and young adults. Merlin has operated midway attractions and theme parks in the UK, North America, Continental Europe, and the Asia Pacific.

Financial Highlights (FY 2018, £million)

(Source: Annual Report, Company Website)

The company’s reported revenue surged to £1,688 million. Underlying Revenue (excluding the impact of IFRS 15), was up by 5.2 per cent (constant currency) to £1,653 million. On a like for like basis (LFL), revenue rose by 1.8 per cent, due to the flat performances in the Midway Attractions and LEGOLAND Parks Operating Groups and growth in the Resort Theme Parks Operating Group. Underlying EBITDA stood at £494 million, while EBITDA margin was 29.9 per cent. This surge was accounted mainly because of the growth in trading of Resort Theme Parks and surge in the accommodation offering over the theme parks. Underlying operating profit increased by 3.4 per cent (constant currency) to £327 millionas compared with the previous year data. The total profit before tax was £285 million. The company reported a profit for the financial year 2018 of £230 million, an increase with the prior year data and generated operating cash inflows of £450 million. Reported earnings per share stood at 22.5 pence while underlying earnings per share increased by 11.7 per cent (actual exchange rate) to 22.9 pence against the 20.5 pence in FY2017. Return on capital employed dipped to 8.9 per cent as compared with the previous year. Underlying operating free cash flow was £345 million, an increase of 9.7 per centas compared with the financial year 2017 data of £315 million. Leverage on net debt to underlying EBITDA was 2.4x.

Share Price Performance

Daily Chart as at May-22-19, after the market closed (Source: Thomson Reuters)

On 22^nd May 2019, MERL shares closed at GBX 332.5, down by 1.511 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 415.70/GBX 304.40. The company’s stock beta was 1.11, reflecting slightly higher volatility as compared to the benchmark index.

Valuation Methodology

*All forecasted figures and Peer information have been taken from the Thomson Reuters.

Conclusion
The group stated it had opened seven new Midway attractions, with two new Peppa Pig World of Play sites in Michigan and Dallas. The company has opened a new 244 rooms, including the 102 'Stargazing Pods' at Alton Towers Resort and 142-room Castle Hotel at LEGOLAND Billund Resort. At the end of May 2019, the group will open the fresh 128-room Magic Hotel at Gardaland Resort.Operational network, liquidity position, and operational performance are its key strengths, even as its operating profit of Midway Attractions remains a cause for concern. However, a positive outlook for the global travel and tourism sector may offer significant growth opportunities for the company. In future, rising wages in the UK, currency fluctuations, and unforeseen circumstances may affect the company’s business and profitability. Based on the strong growth prospects of the company and the valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 332.5 (as on May-22-19) with low double-digit upside potential based on 9x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).

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