Investing in LEGO via Merlin Entertainment

We have been sent in this press article from Pro Active Investors, it is an interesting press piece about how you could invest in LEGO via Merlin Entertainment, if this is something that is of interest it is a very interesting piece and I certainly learnt abit more about parts of the LEGO Group/Merlin Entertainement, the piece was s report was produced by Fat Prophets Senior Analyst Andrew Latto.

The world’s largest toy maker by revenue, The LEGO Group, is privately controlled by family interests in Denmark.  Merlin Entertainments therefore provides one of the only ways to buy into the growth prospects for LEGO.  The visitor attraction company runs six LEGOLAND parks and is set to open new sites in Asia.

Merlin Entertainments is the world’s second largest visitor attraction operator and has the leading market position in Europe.  The world’s largest visitor attraction operator, Walt Disney, has been driven by Disneyland resorts.

Financial issues at Disneyland Paris, owned by Euro Disney, show that the sector isn’t always a walk in the park.  However, LEGOLAND parks enjoys a strong market position and is benefiting from the growing popularity of LEGO.

The power of LEGO

The owner of LEGO, The LEGO Group, offers an insight into the strength of the toy brand.  The LEGO Group’s revenue in 2014 increased by 13% on 2013 and is up by 78% against 2010.

The growth continued into the first half of 2015 with revenue 23% higher than H1 2014.  Other toy makers can’t match this performance with first half 2015 revenue at Mattel down by 5% and Hasbro’s revenue up by only 0.2%.

Toy companies have been hit by the growth of digital devices with consumers moving from board games to iPads.  However, LEGO’s market niche in “playful learning” has seen its popularity go from strength to strength.

The 2004 “The LEGO Movie” has further bolstered the brand with the film generating over US$500m in box office revenue.  A sequel is planned for 2018 and three spinoff movies are reported to be in the works.

The LEGO Group’s owner has a 29.9% stake in Merlin and as such the interests of the two companies are aligned.  Merlin Entertainments acquired four LEGOLAND parks from The LEGO Group in 2004 and currently runs six sites.

Merlin Entertainments in focus

Merlin Entertainments has three divisions which are 1) LEGOLAND parks 2) Midway Attractions and 3) Resort Theme parks.  Midway Attractions are smaller, indoor sites where visitors stay for a few hours rather than a whole day.

Midway Attractions’ brands include indoor LEGOLAND Discovery Centres which are located in city centres or shopping malls.  Other Midway brands include The Dungeons, Madame Tussauds, Sea Life and the Eye Brand.

We estimate that LEGOLAND parks and LEGOLAND Discovery Centres generated 40% of Merlin Entertainments’ profits in 2014.  This proportion is set to grow over time as new LEGOLAND parks are built.

On a geographic basis the UK accounted for 39% of Merlin’s revenue in 2014 while 26% was cane from continental Europe.  North America generated 22% of group revenue and only 13% came from the Asia Pacific region.

Merlin Entertainments – divisions

Looking at the divisions and LEGOLAND parks generated £386m revenue in 2014 and operating profits came in at £120m – a 31% margin.  Midway Attractions generated £529m revenue and operating profits of £167m – a 31.5% margin

The Resort Theme parks division generated £331m of revenue and £50m operating profits – an 18.2% margin.  An accident at Alton Towers in June 2015 has hit trading at Resort Theme parks and seen Merlin’s share price fall back.


Merlin Entertainments – growth plans

The company’s focus for growth is on the roll-out of LEGOLAND parks and Midway Attractions in Asia.  Merlin also has a history of acquisitions with the fragmented visitor attraction industry offering plenty of scope for deal-making.

The group recently signed a deal to expand LEGOLAND parks and Midway Attractions in China.  The joint venture with China Media Capital (CMC) will initially establish a LEGOLAND Park in Shanghai.

LEGOLAND parks planned roll-out


Merlin Entertainments – financial performance

In the four years from 2010 to 2014 Merlin grew revenue at a compound annual rate of 11.8%.  EBITDA profits increased at a compound annual rate of 12.6% over the period with the EBITDA margin coming in at 32.9% in 2014.

Net debt at June 2015 was £989m versus £977m at June 2014 and £935m at the end of 2014.  The group was listed on the London Stock Exchange in November 2013 with the money raised helping to strengthen the balance sheet.

Merlin Entertainment’s financial backdrop


Summary and valuation

Merlin Entertainments offers a way to buy into the increasing popularity of LEGO in emerging markets and the West.  The success of The LEGO Movie, and strong growth at The LEGO Group, highlight the growing appeal of LEGO.

With only six existing LEGOLAND parks – five of which are in Europe and the US – there is significant scope to develop future sites.  The CMC deal supports Merlin’s near-term ambition to establish three LEGOLAND parks in Greater China.

Merlin’s 2015 results are set to be hit by visitor declines at the Resort Theme Park Division.  Like-for-like revenue at Resort Theme parks fell by 11.4% in the first 36 weeks of 2015 but should start to recover in 2016.

Over the same period LEGOLAND parks saw 6.7% like-for-like revenue growth and Midway Attractions saw a 2.6% improvement.  The net effect was that Merlin’s like-for-like revenue in the first 36 weeks of 2015 rose by only 0.3%.

Merlin’s forecast P/E ratio for 2016 is 20X and is expected to fall to 14X by 2019 as new visitor attractions come online.  The valuation is not expensive, in our view, given the quality of the business and the scope to roll-out LEGOLAND parks.


Leave a Reply