A look at the Merlin Entertainments PLC (LON:MERL) share price this year is a bit like looking at a roller-coaster at one of its amusement Parks.
It would be a slightly unconventional roller-coaster, it must be admitted, as the ride started in January with a steep decline as investors continued to fret over the prospect of terrorist attacks deterring people from visiting London.
Merlin, the owner of Madam Tussaud's and the London Eye (part of its Midway division), had flagged a sharp drop in visitors in October 2017 after the Westminster Bridge attack and subsequently said the incident that followed on London Bridge reduced demand further.
READ Terror attacks deterring visitors to London warns Merlin Entertainments
The share price plummet only ended when US activist investor ValueAct lifted its stake and became the third largest shareholder on the theme Parks and entertainments group’s register.
Come April, and the group was still bemoaning low visitor numbers at its Midway brands, as well as the Beast from the East, the icy cold spell that had Europe in its grip in February.
In terms of Merlin seeing a fall in visitor numbers after a violent incident, we have been here before. In June 2015, five people were seriously injured after a crash on the Smiler ride at Alton Towers.
READ Alton Towers Smiler crash
Visitor numbers at Alton Towers were way below normal levels for several months but they eventually recovered and the company must hope the same will happen for its London attractions.
In the first 40 weeks of 2018 organic revenue growth for Midway Attractions was flat year-on-year. The company opened six new Midway attractions in 2017 and has high hopes for its two new Midway brands: The Bear Grylls Adventure in Birmingham, UK, and Peppa Pig World of Play in Shanghai.
It might not be wise in the current environment of fear to have an attraction named after a noted survivalist (Bear Grylls) but at least the attraction is not in London, which is seen as the most likely UK city to attract a terrorist attack, although the bombing of the Manchester Arena during an Ariana Grande concert underlines how any densely populated city can be an enticing target for terrorists.
READ It's been a year since deadly attack on Ariana Grande concert in Manchester
Merlin said visitors to its London attractions declined in the first half of the year, reflecting the continued adverse impact of the terror attacks that took place in 2017; however, summer trading has shown early signs of a recovery, with increasingly consistent, if modest, year-on-year growth reported in recent weeks.
Peel Hunt, meanwhile, noted that the UK heatwave has been “less of a drag on the business than we feared”. It then went and spoiled the party by observing that the repercussions from Brexit might put a dampener on future visits to London by Europeans – at least for a while.
As well as fears over terrorist attacks and the effects of the predictably unpredictable British weather, Merlin is also experiencing mounting cost pressures, many of which have arisen from increases to the minimum wage in the UK.
What is going on at alton towers. Queue for over an hour for the smiler, breaks down. Start queueing for oblivion, breaks down. Walk over to Rita, broken down. Do you not have any engineers? @altontowers pic.twitter.com/Rug9Cjq5kP
— Tony (@tjsmizzy) October 13, 2018
Peel Hunt, which is a buyer of the stock, reckons that increased capital expenditure will eventually pay off for the group – and it said this without saying that Peppa Pig is set to save Merlin’s bacon.
“We believe in the green shoots of recovery in London, although clearly they are vulnerable to the macro, and the potential for the increased capex and the productivity agenda to offset weaker long-term growth in Midway and we reiterate our Buy rating and 450p target price,” the broker said.
The market did not share that optimism and the shares were down 7.4% at 342.3p, meaning the shares are, like all good roller-coaster rides, pretty much back where they started the year.
“The market may be concerned by the caveat that the cost environment remains challenging amid tighter global labour markets,” observed Russ Mould, the investment director at AJ Bell.
“A growing number of governments with more restrictive policies on immigration and, in the UK, the Brexit process are limiting freedom of movement and this issue could continue to affect large-scale employers of lower wage workers such as Merlin,” he added.
Nicholas Hyett, an investment analyst at Hargreaves Lansdown, said, “the worrying thing in these numbers is that the previously strong LEGOLAND business seems to be joining the slump. The LEGO Movie 2, due for release early next year, should provide a boost in 2019, but it’s far from ideal.”
In other words, all in all, Lego is just another brick in the wall …
“It would be a mistake to lose sight of Merlin’s long-term strengths – namely an increasing demand for experiences over material goods and some excellent brands – but the group is undeniably going through a rough patch,” Hyett concluded.
In the view of Richard Hunter, head of Markets at interactive investor, investors in the company are purely focused on potential growth.
“There are signs that this growth is achievable. Resort Theme Park revenues have spiked 9%, benefiting from product investment and favourable weather, whilst growth at its Legoland operations continues apace, with revenues up 6.4%. The decision also to concentrate on providing an experience which includes a short stay at the resorts is also bearing fruit, with Accommodation revenues having risen 28% over the period. Longer term, improving demographics globally could support an upward trend in demand for Merlin’s offerings,” Hunter suggested.
Hunter reckons that for the moment Merlin remains a “jam tomorrow” stock, and the share price is likely to remain in the doldrums until some prolonged stability is seen.
IT'S ABOUT TIME... TO MAKE AN APPOINTMENT WITH THE DOCTOR!
Madame Tussauds Blackpool have released promo photos of their brand new #DoctorWho themed area, the highlight of which is a hugely impressive & astonishingly accurate wax figure replica of the Thirteenth Doctor herself! pic.twitter.com/eKUXu6YcSl
— Pip (@pipmadeley) October 16, 2018