The main surprise in Merlin Entertainments’ full-year figures was the disclosure that the company was raising capital spending in the current year from an expected £270 million to £280 million to between £360 million and £390 million, and for all the best reasons. Merlin plans a dramatic investment in rooms at its various attractions.
These add to the profitability of the attractions by allowing short-stay holidays and increasing the catchment area of each. They have also shown a return on invested capital in excess of Merlin’s own target of 20 per cent plus for any new project.
Other than that, the figures were as expected a touch disappointing, and the shares lost 15¼p to 482p. Growth at two of the three divisions was constrained, for reasons largely outside the company’s control. Midway, which includes the various in-city attractions such as Madame Tussauds and the Dungeons and where London is the largest contributor, suffered a decline in revenues in real terms.
Obviously, security concerns put people off, though the lower pound finally fed through into increased visitor numbers in the final quarter. Restrictions on travel to Hong Kong were a further negative. The division should get back to like-for-like growth of 3 per cent this year.
Comparatives at Legoland Parks suffered from a particularly strong performance in 2014 and 2015, spurred by the arrival of The Lego Movie. Again the parks should return to a more typical 4 per cent to 5 per cent growth.
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Resort Theme Parks was bouncing back from the accident at Alton Towers in June 2015. Once again, normal growth of 3 per cent to 4 per cent is expected.
The figures are complicated by a 53-week year in 2016, but taking the directly comparable 52 weeks, operating profits grew by £11 million to £302 million. Merlin is well advanced with its plans for growth through to 2020, which include four new Legolands, the second just about to open in Japan.
The long-term drivers for Merlin, those new attractions, are still there. The shares have been strong performers since they were tipped
by this column at the start of the year. On 21 times earnings they still look attractive.
MY ADVICE Buy
WHY The share price fall looks like a buying opportunity given the expected return to normal growth and the planned expansion by 2020
Melrose Industries
Shares in Melrose have doubled since this column last recommended them in July and were up 23p to 241½p after a typically upbeat trading statement with the 2016 figures. Some might wonder if this was a good time to take some profits. Nothing wrong with that if it suits your book, but experience shows that waiting for the next deal to come along has been the best strategy in the past.
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Last year Melrose returned £2.4 billion to investors after selling Elster, the metering business. In August it tapped them for £1.6 billion to help to fund the £2.2 billion purchase of Nortek, a maker of security products. This now looks like a lucky bet on the US housebuilding industry under President Trump.
The company has already raised underlying profits from Nortek by a third and lifted its target for margins, below 10 per cent at the acquisition, from 15 per cent to 17 per cent. Once this is achieved and the markets are right, this will also be sold and cash returned to investors.
This is Melrose’s model. Its other business, Brush, the maker of turbo-generators, is facing difficult markets and is not yet fit to be sold. Instead, Melrose is turning its mind to the next big acquisition, which could come as soon as this year.
The timing on these things is impossible to guess, though we are assured the next target has not been identified. The company’s record speaks for itself, and so the price multiple on the shares, well above 20, is hardly germane. Investors should stick with it; new ones might consider buying even at this level.
MY ADVICE Buy
WHY The company’s record is of unbroken success at deals
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Spirent Communications
Recent years have been difficult for Spirent Communications, which makes testing equipment for telecoms networks and the like. There have been a couple of profit warnings, the workload coming through from the big suppliers has tended to be lumpy and there have even been suggestions that the Crawley-based company might be better off as part of a large global IT conglomerate.
Last year marked a low point in revenue terms and there was a 4 per cent decline. This year should see a return to growth, aided by some significant contract wins. An improvement in margins left pre-tax profits some 6 per cent higher at $44.2 million. The company has carried out a review and eliminated some areas of overlap and the benefits of greater efficiency will also come through.
Work on the 4G network by customers is largely over, while 5G is still in its infancy. Spirent is seeing gains in other areas such as cybersecurity, ethernet testing and satellite navigation. The shares have been on a sharp upward trend since the start of the year. Off 1p at 105p, they sell on 22 times earnings, which looks about right for now.
MY ADVICE Avoid
WHY Much of the recovery already seems in the price
And finally...
Arrow Global is a one-off. It buys debt from banks and others for a fraction of the face value and then collects what it can. The main avenue for growth is the Continent, buying from often distressed banks or acquiring specialist businesses. Last year saw plenty of both, a record £223 million of purchases, an acquisition in the Netherlands and Belgium and an agreed entry into the Italian market at the end of the year. The shares were up almost 9 per cent on a confident outlook statement along with the 2016 figures.