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UBS turns cautious on Merlin amid review score decline and Midway uncertainty

Published: 10:12 14 Aug 2018 BST

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UBS also cut its target price for the group to 380p from 425p while reducing its 2019 forecasts

Analysts at UBS have downgraded Merlin Entertainments PLC (LON:MERL) to ‘neutral’ from ’buy’ as a weakening in average review scores and concerns over the recovery of the Midway division drove a more cautious approach.

The Swiss investment bank said in a note that customer review data for the FTSE 250-attractions and theme park operator had highlighted “a continued decline in average review scores” for its Midway attractions such as Madame Tussauds and the London Eye, adding that there was a correlation between this decline in review scores and a fall in admissions.

READ: Merlin Entertainments sees challenging London market and weak dollar dent earnings

However, analysts added that despite the trend “the breakdown by site suggests the brands are not broken, but key sites need improvement” with “a turnaround plan important given the size and profitability of these sites”.

Despite the Midway concerns, the bank said that data from its wait-time monitor, which measures wait-time patterns for select Merlin theme parks and their competitors, had “good [year-to-date] trends” that suggested that “the 2018 rebound [in its theme parks division] should continue”. However they also noted that “declining average customer reviews across the UK theme parks does raise questions around their positioning long-term”.

UBS also cut its target price for the group to 380p from 425p, with a 3% reduction in its forecasts for the 2019 financial year “on a more cautious growth and margin backdrop”.

In its results for the first half of the year released on 2 August, Merlin reported that underlying earnings (EBITDA) had fallen 1.3% to £143mln despite organic revenue growth of 4.5% to £694mln and visitor numbers rising 0.8% to 30mln over the period, while its pre-tax profits by 13.7% to £43mln.

The company said the decline was due primarily to continued difficulties in its London market, where warm weather drove customers away from its indoor attractions, while adverse foreign exchange movements also dented earnings.

In mid-morning trading Tuesday, Merlin shares were up 0.3% at 380.3p.

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