German finance house Berenberg has downgraded Merlin Entertainments PLC (LON:MERL) to ‘sell’ following the theme Parks owner’s results two weeks ago.
The bank argues that while Merlin’s record of delivery warrants shareholders showing some patience, that patience is now wearing thin.
The stock is trading on 22.7 times projected earnings per share for the current year, and that’s a sexy rating for a company that produced a decline of more than 6% in underlying earnings before interest and tax (EBIT) in 2016.
“We feel that Merlin is potentially one misstep away from triggering a material de-rating,” Berenberg said, as it abandoned its neutral position on the Thorpe Park, Legoland and Alton Towers owner and cut its price target to 375p from 440p.
Historical performance from the Legoland Parks has been exceptional, the Berenberg team conceded, but the franchise looks to be running out of steam, as it comes up against increasingly tough comparative figures from a year earlier.
The third quarter of 2016 saw like-for-like (lfl) sales at the Legoland parks decline to roughly zero, while the fourth quarter saw them go negative.
“Given this slowdown, despite the two Lego movies in 2017, we no longer believe 7% lfl growth this year is achievable, and cut our estimate to 5%. We also believe downside risk into Q1 is significant, with only California, Malaysia and the struggling Florida park contributing for most of the period,” Berenberg said.
Meanwhile, free cash flow remains negligible after management increased its capital expenditure guidance for 2017 by more than 30%.
Shares in Merlin were down 4.5% at 474.2p after the downgrade.