While I tend to prefer investing in businesses with a long history of rising dividends, there are some companies that I believe still make attractive investments for the long haul. I believe Merlin Entertainments PLC (LSE: MERL LN) is one of those companies that despite not having a long dividend history, would make an ideal investment.
MER LN is the world’s second largest visitor attractions company operating more than 120 attractions in 24 countries across the globe. Several of the Company’s brands include LEGOLAND, Madame Tussauds, Alton Towers, and The Blackpool Tower.
Enough of the introductions…see below for my financial review of the business:
Here are my findings:
The Company has managed to grow its top line at a pretty decent clip over the past five years, even though its from a relatively small base when compared to the world’s leading theme park operator (i.e. Disney).
While not shown, I did some digging and discovered LfL growth was mixed (some years positive, other years negative). Overall not great, but I’ve seen worse.
Revenue breakdown by business segment
Good spread of revenues between operating groups. Company is not a “one trick pony”.
Geographic breakdown of revenue
The United Kingdom (UK) still accounts for the lion’s share of Company revenue, albeit the area’s share has come down nicely from 40% in 2012. We are not likely going to see a massive shift to areas outside the UK given that the majority of the Company’s sites are actually in the UK. North America exposure is growing nicely, but I am a bit disappointed that Asia Pacific takings is more or less flat since 2012. It must be noted that FX plays a big part in this Company’s operations and can be a tailwind in some years and a headwind in others.
Margins could be better to be honest, as there is evidence of some slippage:
- COGS up on average 9% pa while Gross Profit up 8% and Gross Margin mostly flat.
- Underlying EBITDA by itself has been growing nicely, but Underlying EBITDA margin has fallen from a high of 33%.
- Underlying Operating Income has been posting modest gains, but Margin has been pressured.
On the other hand, Management has been able to grow both Net Income in absolute terms and its Net Income Margin.
EPS, DPS (and payout ratio)
EPS has been growing nicely over the review period and has not impacted by share buybacks.
The Company does not have much of a dividend history but I am expecting modest increases going forward as the business continues to grow. If you are seeking a Dividend Aristocrat, sadly, you have come to the wrong place.
Both Total Debt to Total Assets and Total Debt to Total Equity have been on a downward trend over the review period. I take a great deal of comfort in see this.
As debt levels have fallen, so too have payments (in absolute terms) to service these debts. EBITDA coverage ratios are also very strong.
Number of visitors (annually), Average Spend per Visitor, and Number of Attractions have all been on the rise. I am a bit concerned however with the fact that Average Spend per Visitor is trailing growth in number of visitors…it would appear that more people are visiting the attractions but are actually spending less. I would keep an eye on this metric. Nonetheless, absolute values are pretty strong.
Cashflow from Operations
Cashflow, the lifeblood of any business in any sector, has been on the rise and has comfortably funded dividends and capex over the review period. I don’t expect this situation to change materially going forward.
Despite the shares not being ‘cheap’ as many investors would argue (e.g. TTM P/E @ 18x, and TTM P/B of 2.5x) and sporting a negligible dividend yield of below 1%, I believe MERL LN is good for the long haul. The Company has a strong management team, operates a sound business model with favorable long-term growth prospects (i.e. future visitor arrivals, destination experiences etc.), and is still very much in expansion mode.
And furthermore, despite having the Danish family behind LEGO as a major shareholder, I would not be surprised if the Company was active in M&A as it seeks to grow the business.
What do you think of MERL LN?