Merlin is magic

Merlin operates 99 attraction across 22 countries and such diversity means it offers excellent exposure to the long-term trend towards growing global leisure spend. Indeed, as the West recovers and consumers in emerging markets grow richer, global leisure spending is expected to increase by 5 per cent a year between 2011 and 2016. Merlin is in a particularly good position to exploit this due to its enviable brand portfolio, which includes well-known attractions such as Legoland, Madame Tussauds and SEA LIFE. Management is pursuing several strategies to exploit this growth potential.

The opportunity is not lost on the group's well respected management team which is targeting several growth strategies. One area of potential involves getting more money from visitors at existing sites by expanding the amount of accommodation on offer and thereby encouraging more revenue-boosting multi-day visits. For 2014, the company has already laid out plans for a second hotel at the Chessington World of Adventures Resort and Legoland Deutschland will add 68 bedrooms. The long-term target is to add 200 rooms a year to the portfolio.

There is also plenty of potential for geographic expansion, with the group aiming to have revenue evenly split between Europe, North America and Asia. The large markets of North America and Asia Pacific account for 21 per cent and 14 per cent of revenue, compared with 39 per cent for the UK and 26 per cent from Europe. Acquisition are being used to help drive this. In 2011 and 2012, Merlin opened the doors to the Asia Pacific regions by snapping up Sydney Attractions Group and Living and Leisure Australia. As far as acquisition funding is concerned, chief financial officer Andrew Carr believes the company has enough headroom to look for deals valued between £100m and £200m.

New openings are also powering growth - six new midway sites were opened in 2013 and a further six are expected in 2014. And plans to work in partnership with developers should create higher returns from these capital-intensive projects. Meanwhile, a recently announced new partnership with animated film studio Dreamworks to create Shrek's Far Far Away Adventure - a theme park based on the popular green-ogre franchise - highlights Merlin's ability to attract strong new brands to aid its growth.

All of these factors should feed into increased returns and bottom-line growth. Capital expenditure is a key growth driver for 2014 and a current return on capital employed (ROCE) of 10.2 per cent helps justify the group's 'spend money to make money' strategy. And chief executive Nick Varney thinks the group can do much better, though, and is targeting an ROCE of 20 per cent in the near term. Meanwhile, broker Investec forecasts a 15 per cent EPS compound annual growth rate between 2013 and 2017, "with longer-term earnings expected to maintain this level of annual growth". That said, the strength of sterling may prove a headwind this year.

The £1bn debt pile is on the high side as it represents 2.6 times last year's underlying cash profits. However, the company has been alleviating borrowing pressures. During the year, negotiations resulted in an extended loan-maturity date of July 2019 and the current debt-to-cash-profit multiple is substantially down from 3.7 times in 2012. Ivestec expects this to fall to 1.4 times by the end of 2017. It's also worth noting that money is mostly owed to existing institutional shareholders Blackstone, CVC and Kirkbi after they clubbed together to form a lending syndicate.