Lego Batman cannot save Merlin Entertainments as patience 'wearing thin'
Shares in Merlin Entertainments are only worth 375p and should be sold, said Berenberg on Thursday, downgrading its rating on the Legoland and Madame Tussauds owner.
With the stock closing at 497p the day before, analyst Owen Shirley in London moved to a 'sell' recommendation from his previous 'hold' due to a feeling that investor patience is wearing thin and that "Merlin is potentially one misstep away from triggering a material de-rating".
Results two weeks ago showed its largest division, Midway, recorded a constant-currency EBIT decline of 10% in 2016 and Shirley calculated that, on a same-site basis, visitation has been declining for the last three years.
Although management blamed weak holiday visitation to the UK for the weak performance in the first nine months of 2016, despite a material improvement in the final quarter, Midway achieved a "negligible" improvement in like-for-like sales.
"Even more of a concern is the fact that Merlin’s ability to offset declining visitation with pricing appears to be diminishing."
What's more, hitherto-exceptional Legoland has seen LFL growth decelerate and turn negative against tough previous year comparisons.
Despite the release of 'Lego Batman Movie' and 'Lego Ninjago: Masters of Spinjitzu' in 2017, Berenberg cut its LFL estimate to 5% growth this year from 7% and cautioned that downside risk into the first quarter "is significant, with only California, Malaysia and the struggling Florida park contributing for most of the period".
With capital expenditure being bumped up, free cash flow yield is only forecast to be a lowly 0.4%.