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Merlin Entertainments plans for LEGOLAND

Published: 15:30 08 Mar 2016 GMT

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Merlin Entertainments plans for LEGOLAND

The investment case for Merlin Entertainments is best appreciated with a visit to LEGOLAND Windsor.  The site is packed out when the UK weather is pleasant and is one of six LEGOLAND Parks around the world.  Merlin believes there is scope for “at least” 25 LEGOLAND Parks with three new sites set to open by 2018.

The company’s vision for LEGOLAND is for it to be the first theme Park experience that children want to experience.  This is dependent on the Lego toy brand maintaining its appeal in developed markets and growing in emerging markets.

The vision for LEGOLAND - 

'We want every child, everywhereto grow up wanting LEGOLAND to be their first theme Park experience.'

Source: Merlin Entertainments investor presentation

Lego is marketed as a means of “playful learning” and has maintained its popularity as digital devices have taken off. The Lego Group saw revenue increase by 25% in 2015 and since 2012 revenue is up 55% (in Danish Krona).

This momentum at The Lego Group has been underpinned by the success of The Lego Movie in 2014.  In 2015 the Star Wars movie helped drive sales of Lego sets and going forward the long-term demand driver will be Asia.

The power of the toy building brick has seen The Lego Group overtake Mattel to become the largest toy company by revenue.  Further growth will be supported by upcoming releases of additional Lego themed movie.

The Lego Group four-year financials: “everything is awesome”

Source: The Lego Group

The Lego Group is a family owned business having been founded in 1932 in Denmark.  As such Merlin Entertainments appears to be the only way that investors can buy into the Lego story.

Merlin Entertainments enjoys the global exclusive rights to the LEGOLAND Brand and the owner of Lego having a 29.9% stake in the business.  This ensures strong shareholder oversight of Merlin and aligns the interests of the two groups.

 

The potential of LEGOLAND

The LEGOLAND Parks division of Merlin Entertainments made up 44% of group operating profit in 2015.  There are six operating sites with in Europe, two are in the United States and one is in Asia (Malaysia). 

In the next 24 months we are set to see new LEGOLAND Parks open in Dubai, Japan and Korea.  As such the size of the LEGOLAND Parks estate will increase by half over the next two years. 

LEGOLAND sites today: three in Europe, two in the US and one in Asia

 

 

Source: Merlin Entertainments investor presentation

By 2020 a fourth new LEGOLAND is planned, in either China or the United States, and the long-term potential is for “at least” 25 sites.  This represents considerable growth on the six LEGOLAND Parks in operation today.

Merlin has three options for new LEGOLAND Parks with the first being to own and operate them as is the case for LEGOLAND Florida. The second option is the operated and leased model with “medium ownership” i.e. LEGOLAND Japan.

The last approach is for a management contract, which features no ownership, and is the model for LEGOLAND Malaysia.  This mixed approach will allow LEGOLAND will be developed in a way that is appropriate for each market. 

LEGOLAND Park’s potential: ten sites in Asia

 

Source: Merlin Entertainments investor presentation

Merlin Entertainments’ divisions in 2015

The LEGOLAND Parks division was the main driver of Merlin’s revenue and profit growth in 2015.  This is despite the fact that that the last new LEGOLAND to open was in Malaysia in 2012.

LEGOLAND Parks saw 8.2% like-for-like revenue growth in 2015 following a 13.2% improvement in 2014.  Total revenue growth was higher principally due to new hotel and lodge accommodation at existing LEGOLAND Parks.     

The division’s operating margin of 34.2% in 2015 was impressive and compares to 31% in 2014.  This robust profitability bodes well for the roll-out of further LEGOLAND Parks in the coming years.

LEGOLAND Parks in 2015 and 2014

 

Source: Merlin Entertainments investor presentation

The other two divisions at Merlin Entertainments are Midway Attractions and Resort Theme Parks.  Midway Attractions are short-stay sites that include Madame Tuassauds, Sea Life and the indoor LEGOLAND Discovery Centres.

Midway Attractions was the biggest profit generator for Merlin last year with an operating profit at £167m and had an operating margin at 29.7%. The division saw 2.3% like-for-like revenue growth in 2015 following a 3% gain in 2014. 

Midway Attractions

Source: Merlin Entertainments investor presentation

The other two divisions at Merlin Entertainments are Midway Attractions and Resort Theme Parks.  Midway Attractions are short-stay sites that include Madame Tuassauds, Sea Life and the indoor LEGOLAND Discovery Centres.

Midway Attractions was the biggest profit generator for Merlin last year with an operating profit at £167m and had an operating margin at 29.7%. The division saw 2.3% like-for-like revenue growth in 2015 following a 3% gain in 2014. 

Midway Attractions

Source: Merlin Entertainments investor presentation

The other two divisions at Merlin Entertainments are Midway Attractions and Resort Theme Parks.  Midway Attractions are short-stay sites that include Madame Tuassauds, Sea Life and the indoor LEGOLAND Discovery Centres.

Midway Attractions was the biggest profit generator for Merlin last year with an operating profit at £167m and had an operating margin at 29.7%. The division saw 2.3% like-for-like revenue growth in 2015 following a 3% gain in 2014. 

Over the next five years the group is set to open 40 new Midway attractions with 7 openings planned for 2016.  These include three LEGOLAND Discovery Centers, two Madame Tuassauds and two Sea Life centres.

Merlin’s third division is Resort Theme Parks which includes four of Europe’s top twenty theme Parks.  The six sites are Garda Land (Italy), Heide Land (Germany) and in the UK Alton Towers, Thorpe Park, Chessington and Warrick Castle.

Alton Towers roller-coasters: not pulling in the punters

Resort Theme Parks saw operating profit slump from £60m in 2014 to £18m in 2015 with like-for-like revenue down 12.4% last year.  The weakness was due to the June 2015 roller coaster accident at Alton Towers.

Merlin Entertainments cautions that it is likely to take two years for visitor numbers to get fully back on track.  This is based on the track record of theme Parks in the United States that have experienced similar accidents.

Merlin’s performance in 2015

Merlin Entertainments saw strong profit growth at LEGOLAND Parks in 2015 and a slump in profits at Resort Theme Parks.  Midway Attractions saw flat operating profits with the result that the group’s Total operating profit fell 6.2% to £291m.

However, lower financing costs meant that adjusted earnings per share increased by 0.4% to 17.4p.  This was a resilient performance given the headwinds in the Resort Theme Parks division.

The group’s return on capital employed fell to 9.7% from 10.6% in 2014 but the full year dividend was increased by 4.8% to 6.5p.  Net debt was flat at £937m and the net debt to EBITDA ratio was unchanged at 2.3X.

Merlin Entertainments financials

 

Source: Merlin Entertainments investor presentation

Summary and valuation

Merlin Entertainments saw a 0.3% increase investor numbers last year to 62.9m.  The group is targeting a 20 million increase in annual visitor numbers over the next five years with the main driver being new site openings.   

The near-term performance will continue to be impacted by weak trading in the Resort Theme Park division.  This should be fully out of the picture by 2018 and in that year the forecast P/E falls to 16.5X earnings.

The near-term valuation is higher with the forecast P/E for 2016 at 22.2X and 19.3X for 2017.  In our view, this isn’t expensive given the scope for a four-fold increase the number of LEGOLAND Parks around the world.

Asia is a key area of focus with China the main country in the region targeted for growth.  Merlin recently announced a deal with China Media Capital to develop a LEGOLAND Park in Shanghai and additional Midway Attractions in the country.

This report was produced by Fat Prophets Senior Analyst, Andrew Latto CFA

 

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