Share price plummets as magic, and investors, desert Merlin

Merlin Entertainments suffered its worst day as a listed company with its shares dropping 20% after a weak trading update.

The Alton Towers owner had £900m wiped off its market value as investors took fright at a poor summer and lukewarm forecasts for 2018. Merlin’s shares closed down 89p, at 360p.

The leisure group had earlier blamed terrorism and bad weather for its poor trading, with like-for-like growth of 0.3% in the 40 weeks to October 7.

However that masked underlying difficulties, with only a strong performance by its Legoland parks keeping the growth positive.

Merlin Entertainments’ chief executive Nick Varney pointed to “unprecedented levels of demand volatility”.

He said: “Despite the diversity of our business – by geography, brand and visitor mix – our markets continue to be impacted by certain external shocks, not least terrorism which is currently at record levels of intensity in Europe. We also continue to face significant cost pressures, largely brought about by employment legislation, particularly in the UK.@

Merlin has responded by moving £100m of its capital expenditure from its existing estate into accelerating its accommodation programme.

The group operates Madame Tussauds, Legoland and Sea Life venues around the world, while its UK attractions also include Warwick Castle, Blackpool Tower and the London Eye. Currently more than 70% of Merlin’s profits are generated outside of the UK.

Russ Mould, investment director at AJ Bell, highlighted Merlin’s high trading price – around 21 times forward earnings compared to a 14.8 times multiple for the FTSE 100 as a whole.

“That premium can be justified by Merlin’s strong intellectual property (in the form of its brands), powerful market positions and a reliable (if short) trading history since its 2013 flotation,” he said.

“But it leaves the shares very exposed on the downside in the event of a sudden disappointment – and with near-term trading somewhat weather reliant that is always a risk.”