Strategic, Financial and Business Analysis of Merlin Entertainment for Investment Purposes

This report provides a strategic, financial and business analysis of Merlin Entertainment for investment purposes. It includes an overview of the firm, analysis of the strategic position, financial analysis, and business valuation. The report concludes that Merlin is a good candidate for investment due to the rising share price and positive prospects of the company.

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2017-18 BDM 134
MSc International Accounting
and Finance Project
Candidate Number: 931667
Word Count:
Section 1 – 518 words
Section 2 - 1,793 words – without SWOT
table
Section3 – 3,423 words
Section 4 – 2,843 words – without
Industry median graphs
Section 5 – 1,148 words
Section 6 – 1,057 words
Total words = 10,782 words
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Context Page Page
Section 1 – Executive Summary 5
Section 2 – Introduction and Strategic Analysis 7
2.1 - Merlin Entertainments Competitors 10
2.2 - Merlin’s Strategy 10
2.3 - SWOT for Merlin Entertainment 13
Section 3 - Literature Review and Introduction 15
3.1 - Methods of financial analysis that can be conducted using
publicly available information.
15
3.2 – Ration analysis 15
3.3 - Advantages of ratio analysis 16
3.4 – Trend analysis 16
3.5 - Advantages and Disadvantages of Trend Analysis: 17
3.6 - Vertical Analysis 17
3.7 – Horizontal Analysis 18
3.8 - Empirical evidence based on Merlin Entertainment: 18
3.9 - Methods and usefulness of business valuation techniques 19
3.10 - Extent to which financial analysis and valuations using
publicly available corporate information that provides a
faithful representation
22
3.11 - Conclusions regarding information and tools that needs to
be used in the completion of financial analysis and
company valuation
23
Section 4 – Financial Analysis 24
4.1 - Profitability 24
4.2 - ROE and ROCE 28
4.3 – Liquidity and Working Capital Efficiencies 29
4.4 - Total and non-current asset efficiency 34
4.5 - Financial Gearing 36
Section 5 – Business Valuation 39
Market Cap, Book Value per share, P/E ratio 39
5.1 - Discounted Free Cash Flow 41
5.2 - Conclusion 41
Section 6 – Conclusion 43
6.1 - Conclusions and Recommendations for Merlin 43
Appendix 1 - 48
1.1 - Balance sheet for DMP and BPB 2015, 2016 and 2017 50
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1.2 - Income Satatements for Merlin 2015, 2016 and 2017 51
1.3 - Income statements for DMP 2015, 2016 and 2017 51
1.4 - Income statement for Blackpool Pleasure Beach 2015, 2016
and 2017 results
52
1.5 - Cashflow Statements of DMP, BPB and Merlin 52
1.6 - Industry Medians – Reuters 53
Appendix 2 - 54
2.1 - Liquidity, Working Capital Efficiency and Total and Non-Current
Asset Efficiency Calculations
54
Appendix 3 - 55
3.1 - Financial Gearing 55
3.2 - Merlin calculations 55
3.3 - BPB calculations 55
3.4 - DMP calculations 56
Appendix 4 - 57
4.1 - Profitability ratios. Income Satatements extracts for Merlin
2015, 2016 and 2017
57
4.2 - Profitability calculations 58
4.3 - ROCE for Merlin with taxes in 2017 58
4.4 - Income statements for DMP 2015, 2016 and 2017 58
4.5 - Income Statement for Blackpool Pleasure Beach 2015, 2016
and 2017 results
59
4.6 - DMP and Merlin extracts for hotel prices 59
Appendix 5 - 60
5.0 - Business valuation calculations 60
5.1 - Merlin interim 2018 cashflow extracts 61
5.2 - Merlin Interim income statement and balance sheet 2018. 62
5.3 - Interim 2018 revenue growth of Merlin 63
Appendix 6 – 63
Discounted free cash flow calculations 63
6.1 - Extracts for CAPM 64
6.2 - Growth rate calculation for free cash flow 66
6.3 - Second method to ascertain growth rate 67
6.4 - WACC fir Merlin 67
6.5 - DFCF calculation 67
Appendix 7 - 69
7.1 - Book Value calculation of Merlin Entertainment 69
7.2 - P/E ratio calculation 69
References - 71
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Section 1- Executive Summary
This report was undertaken to understand the strategic, financial and business analysis of
Merlin Entertainment for investment purposes. An overview of the firm and an analysis of the
strategic position was undertaken in section two, which states Merlin has six strategic growth
drivers to achieve by 2020 and this will increase their asset base. Furthermore, Merlin
changed a portion of their strategy mid-term 2018 for better returns to be attained. Due to
the crash at Alton Towers and terrorism scares at London, Merlin had lower visitor numbers
in 2017, however, interim results 2018 state that there is a rise in revenue turnover of 4.5%
from previous results suggesting a small recovery is taking place.
The financial analysis of Merlin is conducted in section four of the report and critically
analyses the profitability, ROE & ROCE, liquidity and working capital efficiency, total and
non-current asset efficiency and financial gearing of Merlin Entertainment alongside Drayton
Manor Park and Blackpool Pleasure Beach. The profitability ratios of Merlin are positive
except for the U.K which stated static results, the reason Merlin changed their strategy
midway 2018 indicating quick reactions from the board.
Overall Merlin are ahead of competitors and industry medians with all the above analysis
except for total and non-current asset efficiency and financial gearing in the industry. Merlin’s
total and non-current assets efficiency revealed investments that are going to be realised in
the future. The firms have a high gearing ratio of around 50% debt to equity which is rising
every year as the firm takes on more debt.
Business valuation of Merlin revealed that there was a fall in the share price in 2017 (£3.63)
and this had recovered in 2018 to £4 per share. The reason the share price reduced in 2017
was because Merlin issued extra ordinary shares as part of their group employee share
incentive scheme and costs increases did not match revenue increases due to static
turnover in the U.K. Merlin’s market capitalisation as at 29/09/2018 is £4.09 billion. 2017
book value of Merlin is £1.53 indicating the market has over valued the share price, and on
that basis Merlin’s market per share is positive and fair as they have intellectual property in
their total assets which are going to be realised to profits moving forward.
However, both valuation methods did not incorporate future earnings of Merlin so a
discounted free cashflow method was used which determined a share price of £11.88 based
on a cashflow growth rate of 6%. The recommendations that were given in the report was to
retain dividend payments for a certain period or even take on extra debt to achieve a share
price close to £11.88.
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This report concluded that due to the rising share price and the prospects of the company
looking positive moving forward, Merlin is a good candidate for investment. Merlin have a
geographical portfolio and the losses of the firm can be averaged out making Merlin a less
risky firm to invest in. However, returns from certain investments may take longer to realise
into profits while some returns may be realised sooner.
518 words
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Section 2 – Introduction and Strategic Analysis
Merlin Entertainment are a UK based company that are in business in the leisure industry.
Merlin was incorporated in September 2013, and is headquartered in Poole Dorset, England
and has 3 parent shareholders. Blackstone (NYSE: BX), KIRKBI A/S and CVC Capital
Partners (‘CVC’). Merlin run and own 124 attractions in 25 countries covering four
continents, they also operate 18 hotels, six holiday villages across the four continents. Merlin
is Europe’s Number one entertainer in attractions and they are the second most visited
attraction operator in the world (Merlin Entertainments, 2018).
Merlin is listed on the London stock exchange and is on the FTSE 100. Recently, due to
health and safety issues at Alton Towers, Merlin share price has been declining, and there
was a fall in the FTSE. However, they decided to split the asset-backed theme parks and the
Legoland franchise from Midway (Financial Times, 2017a). By doing so, Merlin has created
value by the split. As Merlin is on the London stock exchange, they need to comply with the
UK Corporate Governance Code, The Disclosure and Transparency Rule and the Listings
rule (Merlin Entertainments, 2018).
Merlin take the responsibility of corporate governance very seriously. They are committed to
high standards of corporate governance across the whole group and their shareholders. The
main board at merlin take the responsibility of the strategy and the management of their
strategy by holding 6 meetings throughout the year, and more if needed, to ensure
objectives are met. Also, the way the chairman and board of directors under each committee
are nominated are in accordance with UK Corporate Governance Code and the Listing Rule.
Merlin is in the theme park industry and have a Health & Safety and Security Committee
along-side the standard committees, Audit, Nomination and Remuneration (Merlin
Entertainments, 2018).
Merlin is required to prepare their group accounts annual financial statements in accordance
with International Financial Reporting Standards (IFRS) that are adopted by the EU
(Adopted IFRS) and all the law that is applicable. The company’s annual financial
statements must be prepared to confer with the UK Accounting Standards and FRS 101
(Reduced Disclosure Framework) (Merlin Annual Report, 2016).
As mentioned above Merlin has many commodities that complement each other. Such as,
the hotels which are located in the theme parks, so visitors stay longer.
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(Merlin Entertainments, 2018)
Merlin have two products –
 Midway and
 Theme parks.
Their Midway attractions are indoor with a two-hour experience of fun and are located
around city centres and resorts; these are Sea-Life Centre, The Dungeons, Madame
Tussauds, Shrek’s Adventure, Warwick Castle, The Eye Brand and Legoland Discovery
centres. There are 104 Midway attractions spread across Merlin’s global portfolio which has
accounted for 44% of Merlin’s revenue in 2016. Merlin are growing their Midway attractions
across the globe with 100+ locations that they have identified (Introduction to Merlin
Entertainments, 2016).
Merlin has three operating groups, Midway, theme parks and the Legoland parks. Theme
parks have a 1-3-day fun experience that have onsite accommodation for visitors. There are
6 parks, Alton Towers, Thorpe Park, Chessington World of Adventures, Warwick Castle,
Gardaland, and Heide Park that accounted for 22% of revenue for the group in 2016. Merlin
has 7 Legoland Parks across its global portfolio and a 34% revenue stream for the group in
2016 (Introduction to Merlin Entertainments, 2016).
Merlin has many complementary commercial operations that run throughout their three
operating groups. Merlin has restaurants, games, shops that sell trophies and photos of
visitors, so they can cherish their memories. They sell drinks and slush throughout their
theme parks for thirsty visitors and are constantly making updates to their attractions with the
help of their research and development team, Merlin Magic Making (Merlin Entertainments,
2018). Merlin are in the family entertainment industry with strong brands, their market are
adults and children’s off all ages, this gives Merlin an advantage as their market is everyone
who wants to enjoy fun days out and a couple of days break. Merlin has even targeted
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babies as their market, by opening CBeebies world in Alton Towers; they even have a
CBeebies hotel at the resort.
(CBeebies Land and Hotel, 2018)
Over view of the market for Merlin seems positive as there are many emerging middle-
classes globally that are willing to travel for entertainment as fares for flights are low; 1.8
billion visitors are anticipated to travel by 2030, this is an increase of three-folds from 2000
results (Merlin Entertainment, Annual reports and 2017; p19). However, the International
environment seems volatile due to visa restrictions in some areas such as, People’s
Republic of China have visa restrictions to fly to Hong Kong because of terror attack
activities. Also, terror attacks in the heart of London are the reason Merlin had a decrease in
revenue in London, 2017. Terror attacks have affected foreign exchange rates on
international tourism bringing exchange rate losses to Merlin, but this is not a permanent risk
to Merlin as security tightens up globally (Merlin Entertainment, Annual reports and 2017;
p19).
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2.1 - Merlin Entertainments Competitors
There are many competitors that Merlin have that are in business in the entertainment
industry but at a smaller scale, for instance, Drayton Manor Park, who also, have a hotel on
site.
(Fame, from Aston University portal, 2018)
As seen from the above chart, these are companies in the leisure industry that run across
the UK. According to turnover and asset base, Merlin are by far the leader. Blackpool
pleasure beach is a good comparison for competitor analysis because they have a theme
park and hotel; they seem to be making a good turnover from their theme park but seem to
have made a loss. Blackpool pleasure beach claims that bad weather at peak times and
Easter is the reason for their losses (Insider Media Limited, 2017). Drayton Manor Park is
another competitor that are good for analysing Merlin’s financial statements because of the
theme park and hotel. Both competitors that are chosen are smaller in revenue and asset
base because Merlin has many products and brands, as they are the leader in the UK and
are second best to only Disney World around the globe (Merlin Entertainments, 2018).
2.2 - Merlin’s Strategy
Merlin strategy since they created the company in 1999 has been about growth. “To Create
a High Growth, High Return Family Entertainment Company Based on Strong Brands and a
Global Portfolio that is Naturally Balanced Against the Impact of External Factors”
(Introduction to Merlin, 2017).
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(Introduction to Merlin, 2017; p 4)
According to the above chart, Merlin analyses revenue by weather exposure. Blackpool
made a loss because their theme park is an outdoor entertainment. Because Merlin has
indoor entertainment such as the Sea Life Centre not only are they not effected by the
weather, but they run all year around generating 61% of annual profits. Also, they have
increased in size by an extra 40 sites and moved in 7 new countries from 2011 to 2016.
However, 2017 medium-term adjustments were made to the strategy, and capital allocation
reduced at midway attractions and was allocated to accommodation as strong returns and
productivity was reported (Merlin, 2017: p19). Merlin’s cash flow risk is kept at a minimum by
having strong relationships with lenders and keeping an eye on the debt market, so funds
can be attained at the right price and time to meet strategy (Merlin, 2017: p39).
(Introduction to Merlin, 2017; p 5)
As you can see from the above context, Merlin has increased leisure spend in a 10-year
span, from 2015 to 2025. They have invested in short breaks and hit the city centre as a
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location for their all year around Midway attractions in many countries around the world.
Legoland has been a big hit for Merlin Entertainment as holding global exclusive rights to the
brand name as their competitive advantage.
Merlin has six strategic growth drivers to hit by 2020.
1- They add new rides to existing theme parks, so visitors can enjoy a new experience.
2- Strategic synergies are created by merlin, so they can extend operational efficiency
and exploit larger markets with buying power.
3- Turning theme parks into short breaks by adding 2000 new rooms for visitors by
2020.
4- Midway roll out are clustered around the globe to take advantage of lower operating
and marketing costs and cross selling advantages.
5- Creating new Lego Land theme parks around the globe.
6- Any opportunity of acquisitions that complement their existing business. Merlin is also
holding tour bus operations (Introduction to Merlin, 2017; p 6).
Merlin has 2 strategic synergies, Merlin Annual Pass and accesso roll out to bring in
revenue. The Annual pass allows customers access to Merlin’s attraction around the country
they purchase in. Merlin has three types of annual passes. Standard pass that allows
discounts across its attractions. Premium pass holders get free drinks and extra perks
around their attractions plus free parking at some attractions. VIP pass holders have access
to all theme parks around the globe. This helps Merlin with advanced cashflows and
assurance that complementary products will generate revenue such as their restaurants and
gift shops (Introduction to Merlin, 2017; p 12). Merlin has achieved high growth in revenue
from these annual passes in UK, Germany, Australia and the USA. Cashflows are averaged
out during the year for accounting purposes.
Accesso roll out is a way of selling tickets to visitors in a fast and convenient way. Merlin
holds mobile sales and ticketing that help with up-selling, cross-selling, quick-selling with
their SAAS software as a service. They also work on que busting for efficiency. Furthermore,
Merlin hold group promotions for extra revenue using a number of brands such as Tesco,
News International, McDonalds and Kellogg’s. Recently, Merlin has joined in partnership
with Coca-Cola, who offer 50% of entry at their 30 attractions in the U.K when the customer
returns their 500ml bottle (Introduction to Merlin, 2017; p 12) (Merlin Entertainment,
Recycling Initiative, 2018).
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2.3 - SWOT for Merlin Entertainment
Strengths-
Merlin has many strengths that make them one of
the most successful company in attractions around
the globe.
 Merlin has a strong brand portfolio
 Reliable suppliers
 Strong dealer relationship
 High level of customer satisfaction
 Good return on capital expenditure
 Superb performance in new markets
 And a good track record in developing
new products, thanks to Merlin Magic
Making resource.
 Merlin Magic Making as a resource
 Advance cash flow
(Merlin Entertainment, 2018 website)
Weaknesses-
These are where Merlin need to improve on-
 Health and Safety issues
 Gaining customers trust over health and
safety issues (Financial Times, 2016).
 Drop in share price in 2017 (Financial
Times, 2017b).
 With all the new attractions reported to
open comes new challenges and risks
 Reliant on consumer spending.
 Competitive market.
 Bad image in the tabloids due to the crash
at Alton Towers, need to work on gaining
image (Financial Times, 2016).
 Competitors- Merlin are second best, still
behind Walt Disney in visitor numbers
 13.7% fall in pre-tax profits in the 26-week
ending 30th June 2018 (BBC News, 2018).
Threats-
 Bad Weather.
 Fear of terror attacks by delusional
people in society.
 Brexit, as U.K and European citizens will
now need a visa to travel and there may
be some other hidden costs to travel,
such as taxes which in-turn will slow
down tourism (The Independent, 2017).
 Exchange rate/ Interest rate changes.
 Threat of cyberattacks as technology
requires cloud storage, and as merlin is
growing their asset base, this threat is a
great risk due to reputational damage
(PWC, 2015-2019 report).
 Availability and delivery of new sites and
attractions (2017, pg39).
 Probability of world war three because
Trump is the president of the United
States and he tends to cause trouble
around the globe for example, declaring
Jerusalem as the Capital of Israel has
caused fights and many have been killed
on both sides (QUARTS, 2018; The
Guardian, 2018).
Opportunities-
 Entering more countries with their Lego
Land franchise.
 Alton Towers has added a virtual reality to
their park called Space-themed Galactica.
If this is successful, these can be added
around all their theme parks even a virtual
reality ride for children in Lego-Land
theme parks, in-turn this will increase
customer visits (The Guardian, 2016).
 The rise in global middle classes means
more spending for the entertainment
industry (BBC News, 2013).
 Shuttle roller coaster added to a theme
park and if successful these can be added
to portfolio, currently shuttle roller coasters
are at -
(Global Industry Analyst Inc, 2015).
 Growing their midway attractions, as they
run all year.
 New e-commerce platform introducing in
2018 to reduce queues (2017:pg 10).
The above SWOT has pinned down a brief view of the main causes; this report will refer to
the SWOT table to identify the impact of any of the above on results or performance.
However, the biggest threat to Merlin is Brexit and terrorism. If Brexit causes visa restrictions
profits will be affected heavily. Also, if a bomb was to go off in one of the theme parks, that
will be the end to Merlin. Merlin have extra security such as bag searches at theme parks in
London, they need a better plan to eradicate this threat, though the probability of this
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happening is low the consequences are high. Moreover, they need their IT platform to be as
secure as possible otherwise visitors will be reluctant to use it.
Word count 1,793 (without table)
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Section 3 - Literature Review
Introduction
This literature review will critically evaluate the current academic debate regarding the
methods of financial analysis and business valuation techniques and demonstrating how
useful they maybe to Merlin Entertainment. Furthermore, this study will draw sources from
academic literature to explain the extent to which financial analysis along with business
valuations are utilised using publicly available information on firms that can deliver a faithful
representation of the business enterprise. Finally, conclusion will be based on the
information gathered and the tools identified that can be used for the completion of the
financial analysis along with the valuation of Merlin Entertainment.
3.1 - Methods of financial analysis that can be conducted using publicly available
information
The financial evaluation procedure can be divided into different stages during which different
sources of information can be accessed. Scholars have identified that the different stages of
financial analysis can be divided, firstly, into the purpose and context of the evaluation
followed by the collection of data, processing the data and finally analysing & interpreting the
financial data (Weygandt et al. 2015). Furthermore, the analysist will develop and
communicate the conclusions, recommending and in some cases will conduct on going
analysis if necessary.
There are many tools and techniques that an analyst can use. For instance, ratio analysis is
an effective tool to illustrate different associations in the financial statements that might
perhaps on their own cannot identify suitable pointers for aspects of a firm’s real
performance and position (Hoskin et al. 2014).
3.2 - Ratio Analysis:
Firms can use ratio analysis to assist in comparing two or more variables. Similarly, in
analysing the financial performance, specific financial ratios can be considered as a
correlation between two different numbers or different financial accounts (Brigham et al.
2016). Therefore, the figures under consideration can be compared in correlation to better
understand any differences from previous results.
Furthermore, ratio analysis is used to form budgets and assist in industry benchmarks.
There are five most common ratio analysis classified as liquidity, turnover of assets, firm’s
leverage, solvency and profitability (Saunders, 2014). Reviewing ratios to compare prior
periods or industry specific benchmarks will assist management to identify the strengths and
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weaknesses of the firm and if they are meeting objectives. Management may deliberately
misinterpret ratios to meet targets, though the new version of accounting standards set
makes this difficult to do so. Moreover, measurements of some ratios may suggest that
expectations are negative. However, according to the CMI’s latest national management
salary survey 1/3 of managers failed to meet performance related expectations and still
received a bonus (The Telegraph, 2015).
3.3 - Advantages of ratio analysis:
Interpretations of financial assertions along with notes are necessary for stakeholders, as
different stakeholders use financial data for different reasons. Therefore, ratio analysis
become an important tool for financial evaluation for management.
As suggested by Ntim (2015), ratio analysis assists in measuring a firm’s profitability. Profit
is considered as one of the main objectives of each business concern. Therefore, just a
profit figure on its own cannot ascertain whether it is a positive or a negative figure for a firm.
Managers will use profit ratios such as, gross profit ratio, expense ratio and net profit ratio
among many others for identifying and improving issues (Trigeorgis and Reuer, 2017).
Managers can also, evaluate operational efficiencies using ratios. Return on capital
employed and return on equity are used by managers to evaluate efficiency in assets and
other resources (Jim Shoesmith, 2004).
Furthermore, firms need to ascertain that they can raise cash immediately, every corporation
has the need to make certain that some of their assets are liquid. Current ratios (current
assets (CA) minus current liabilities (CL)) and quick ratios (CA minus inventory/ CL) are
used by firms to maintain the requisite level of short term solvency (Weil et al. 2017). Also,
Beaver failure ratio emulated from Beaver, W.H (1966) can assist firms in predicting failure
using a ratio (cash flow/total debt). The total debt in the formula will include all liabilities plus
equity like debts such as preferred stocks. The Beaver ratio suggests that 70% of firms with
a failure ratio of less than 0.3 failed within five years (Beaver, 1966). The financial ratio can
help in ascertaining long-term solvency or assist in determining if the firm is over-leveraged
(Davila et al. 2015).
3.4 - Trend Analysis:
Trend analysis is another method of financial analysis of firms, also, known as technical
analysis. Trend analysis can aid in identifying specific trends in specific ratios particularly
over an extended period (generally 5 to 10 years). This can be used by financial analyst for
predicting the future stock price movements established from recently observed trend data.
Essentially, financial trends, might perhaps for instance, stress on developing and growing
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work towards attainment of steadiness of profitability, liquidity and many others, based on
the idea of what has happened in the past indicates of what may happen in the future
(Chiapello, 2015).
Moreover, intending to recognise trends, the analyst has the need to identify discontinuity in
specific trends. This refers to sudden alterations in specific financial ratios that might identify
important business alterations that need to be integrated within the evaluation. Companies
that have a strong digital presence such as Alibaba and Amazon will use trend analyse to
analyse their products, and the retail sector will analyse trends such as fashion clothing.
3.5 - Advantages and Disadvantages of Trend Analysis:
Trend analysis aids analysts in undertaking inter-firm comparisons between two or more
corporations of the same kind over a specified time. Also, trend analysis can be compared
with specified industry average. Therefore, it can assist in understanding overall strengths as
well as weaknesses of a specific firm in comparison to other associated corporations in this
sector. This report will be using Drayton Manor Park and Blackpool as comparisons. Also,
IBM have a wealth of data to conduct trend analysis amongst competitors and other
industries focusing on the customer (IBM, 2014). In addition to this trend analysis also, helps
in carrying out effectual comparisons with absolute data based on which management can
arrive at decisions (Petty et al. 2015). Furthermore, trend analysis also aids analysts along
with management to comprehend short-term liquidity positions along with long-term
solvency. The disadvantage in using trend analysis is deciding on a base year, as the
chosen year can change an outcome of the trend that is trying to be achieved and data must
be long, reliable and detailed (Mietzner, D. and Reger, G., 2005).
3.6 - Vertical Analysis:
Evaluating a financial statement for a specified period is said to operate properly with vertical
analysis. In the income assertion, specific percentages reflect the correlation of each
separate account to essentially net sales for example, every line-item in the financial
statement is set as a percentage (Petty et al. 2015). Essentially, vertical analysis on a
balance sheet is utilised over all assets as well as liabilities for carrying out comparative
analysis of particularly individual accounts on a balance sheet (Trugman, 2016).
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3.7 - Horizontal Analysis:
Bekaert and Hodrick (2017) stated, horizontal analysis uses comparisons of sets of data for
different periods. Essentially, users of financial statements analyse alteration in data as a
pointer. Particularly, optimistic analysts intend to analyse revenue growth, net earnings,
financial assets of the firm in addition to decline in firms expends along with liabilities.
Enumerating absolute changes in pound calls for the user to deduct the base figure from the
present figure. Presenting alterations with specific percentage has the need for dividing
overall base figure by the figure of the current period, thereafter multiplying the same by 100
(Trugman, 2016).
3.8 - Empirical evidence based on Merlin Entertainment:
The financial declarations of Merlin reflect detailed results and presentations along with key
financial data. The management of the firms presents the development of income statement
by analysing sales, operating profit, net income, net margin and operating margin over the
years (Clark et al. 2015). Merlin Entertainment also, analyses financial condition of the firm
using total visitors along with growth of the visitors. In addition to this, the firm also, analyses
the total revenue along with revenue growth. Furthermore, the company also considers
growth in Like for Like sales (LFL), underlying EBIDTA together with margin, underlying
operating profit of Merlin and thereafter the margin.
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(Merlin Entertainment, 2018).
Therefore, it can be mentioned that the company utilises key financial ratios for analysis.
This can shed light on different issues of the business enterprise and stresses on certain
positives. Furthermore, ratios can act as whistle-blowers that help in drawing attention of the
management towards issues that require action. Utilisation of ratio analysis can help in
validating otherwise disproving decisions on financing, investing as well as operating of the
business enterprise. Management of Merlin also uses key ratios for simplification of intricate
accounting assertions, identification of areas of problem, conduction of comparisons with
different other firms (Burns 2016; Merlin Entertainment Annual Report, 2016).
3.9 - Methods and usefulness of business valuation techniques
The discussion deals with the various methodology adapted by Merlin, it includes a set of
techniques and procedures for determining the value of a business. The approaches that are
used for the valuation of an industry rely on various set of economic principles (Parr, 2018).
However, the various processes and mathematical details differ from business to business.
The types of approaches that can be discussed to value the methods and usefulness of
Merlin is firstly, the market approach as a valuation of a business entity, it is said to be the
most compelling way of determining what the business is worth.
Based on the reports pronouncements of Merlin Entertainment, it is important to select the
business valuation processes. There are different well-instituted mechanisms for
ascertainment of a business value and it can be a good idea to utilise many of them for
cross-checking outcomes. The most three common classes of business valuations are, cost
approach, market approach and discounted cash flow. As mentioned by Petty et al. (2015),
the cost approach refers to the cost incurred for building something. This is not commonly
employed by finance professionals for attachment of value as a going concern. In addition to
this, market approach indicates towards relative valuation and is time and again utilised in
the segment. Particularly, this entails comparative analysis. Ultimately, the discounted free
cash flow approach is a specific form of intrinsic valuation and can be detailed as well as a
thorough approach in the process of a valuation (Schaeck and Cihák 2014).
The market capitalisation of Merlin Entertainment is registered to be £3,702 million, as of
December 2017 (1,020m shares x £3.63 price). This shows that the company has used the
market approach that entails valuation mechanisms that utilise transactional data. The
market value of the business is revealed by the price that is fetched by the business in an
actual sale. It deals with comparison of statistical data of the business with similar
businesses and finds out the price of the business accurately. As suggested by Burtonshaw-
Gunn (2017), one of the biggest benefits of the market-based approach is that it is quite
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easy to comprehend and relatively less intricate, and at the same time less time consuming
than the income approach. Particularly, it is said to be a considerably quick and a simple
way to approximate what the business is worth. If information is delivered concisely, then the
purchase price might perhaps also replicate synergies otherwise factors of risk that the
purchaser has imputed, particularly the price tag that might perhaps not be pertinent for the
business under deliberation. Bekaert and Hodrick (2017), agree that it might perhaps also
not be pertinent as conditions of a business might alter. In addition to this, there is another
threat attached to this method, there might be difficulty involved in the process of finding
corporations that are absolutely the same as the business under valuation. Therefore, a
multiple that refers to the valuation for a peer, might perhaps not be representative of the
target corporation.
The next valuation method is the adjusted net asset value that deals with the changes in
values of the company’s assets and liabilities to reflect the current fair market value and
comparison with like to like items. Adjusted net asset mechanism is essentially a technique
for valuing a business that alters the stated values of assets/liabilities of the firm; this can
replicate estimated present current fair market values in a better way. As suggested by
Batkovskiy et al. (2016), this approach is primarily utilised by corporations that might
possess a going concern problem and are undergoing liquidation. The net asset value
approach might perhaps be utilised for different investment holding corporations, for
instance, real estate or else financial investments, in which assets/liabilities are ascertained
utilising either the market otherwise the income approach. However, on the other hand,
Peirson et al. (2014), argues that the primary disadvantage of this method is that it does not
take into consideration the future earnings of the corporation and therefore will be lower than
the market value and income approach. Essentially, in the case of liquidation, the specific
real value of the corporate might perhaps be greater than selling the firm’s assets since the
internally generated products are not registered on the firm’s balance sheet for example,
Coca-Cola may be worth far less when deducing just the assets and liabilities as their brand
is worth much more, and only when consideration for selling is mentioned then a price for
the brand will be conducted.
Bekaert and Hodrick (2017), mentioned that asset accumulation method is common in
models of cash flow, dividend discount and capitalisation. The technique of dividend
valuation model is used to value the price of the stock of a company based on the theory,
mentioned by Zietlow et al. (2018), that states, that the stock is worth the sum of all the
future dividend payments, discounted back to their present value. The discount factor is a
rate that represents the time value of money for example, dividends are distributed to equity
holders, therefore the discount factor should be based on cost of equity (CAPM). The CAPM
20

uses the risk-free rate that can be taken from the U.K treasury bill, expected market return
that can be retrieved from FTSE for Britain and DOW Jones for the USA, and uses the
market risk premium to make an estimation. “While the assumptions made by the CAPM
allow it to focus on the relationship between return and systematic risk, the idealised world
created by the assumptions is not the same as the real world in which investment decisions
are made by companies and individuals” (ACCA Think Ahead, 2018 website).
(Kaplan Financial Knowledge Bank)
Therefore, this suggests that the real-world capital market is far by perfect. The CAPM
assumes a perfect market which assumes perfect conditions such as, no taxes and
transaction cost and information is freely available. The CAPM can change frequently such
as the beta which changes every day and can be retrieved from the financial times daily
(ACCA).
(ACCA, Think Ahead, 2018, website)
Another method identified by Burtonshaw-Gunn (2017), states the price earning multiple
which indicates that the amount of investment in pounds an investor can expect in a
company to receive one pound of the company’s earnings. Clark et al. (2015), states that the
price earning is the ratio for valuing a company that measures the current share price
relative to its share earnings. Therefore, the price-earnings ratio is known as the earning
multiple. Also, this method may give a high valuation as it is multiplying P/E with underlying
earnings.
The next model identified in the context of business valuation is the Free Cash Flow to
Equity (FCFE). As pinned by Chiapello (2015), the free cash flow to equity is the measure of
the amount of cash that is available to the equity shareholders of a company after meeting
21

various expenses, reinvestment and debts. It is the measure of usage of equity capital. In
addition Davila et al. (2015), states that the FCFE is used by the analyst in case there is no
dividend amount available in a company as an alternative to the dividend discount model.
For example, cost of equity for the dividend model is fine because shareholders are equity
holders, however, free cash flow is for debt and equity holders, so there is a need for a
discount rate that reflects both.
(Kaplan Financial Knowledge Bank)
Weighted Average Cost of Capital (WACC) is the firm’s own debt and equity that takes tax
into consideration. However, the WACC takes into consideration the investment risk of the
debt already in the company and if a firm takes on more capital debt, then the WACC will
need to be adjusted before appraising new projects (Kaplan Financial Knowledge Bank,
website).
3.10 - Extent to which financial analysis and valuations using publicly available
corporate information that provides a faithful representation
The faithful representation refers to the concept in which the financial statements of a
business is reflected accurately. It includes the results of the operation from the statements
like the cash flow, balance sheet and income statement that are re-disclosed to the
stakeholders of the company. Weil et al, (2017) points out the expected utility theory and the
theory of rational choice to determine the effectiveness and reliability of the financial
statements as a true and fair representation of the company value. The hypothesis in the
analysis assumes the existence of a reality that is exterior to the observer. The financial
position is taken to be an objectively observable reality expressed in the accounts.
Therefore, the expression of true and fair can be easily determined with this theory (Weil et
al. 2017). The IASB conceptual framework also states that the faithful representation is an
economic phenomenon that allows the potential investors to take economic decisions.
Therefore, for a business valuation to be reliable the information must be relevant and
faithfully represented (Deloitte.,2018).
At Merlin entertainment, the accounts are prepared on historical cost basis and investments
are measured at fair value. Ratio analysis has been done as identified in the annual report to
find out the financial position and the operational efficiency. During the year an external
effectiveness review of the Committee took place, based on a questionnaire sent to
22

Committee members, all other attendees and the board (Merlin Entertainment Annual
Report, 2016: p60). According to Ntim (2015), this highlights the faithfulness of the financial
analysis. An example of faithfulness can be given in terms of revenue recognition, that takes
place at the point of entry and revenue from the sale of annual passes is deferred and then
recognised evenly over the period. When it comes to expenses they are recorded in the fair
value as per the annual report. In addition to that, it can be said from the independent audit
report that has been approved by KPMG for Merlin Entertainments, as per their opinion
state, the statements are true, fair and faithfully represented as the statements have followed
the IASB framework and the audit has been conducted according to the International
Standards on Auditing (UK) and applicable law. The auditors believe that the audit evidence
is sufficient and appropriate enough for their opinion (Merlin Entertainment Annual Report,
2016).
3.11 - Conclusions regarding information and tools that needs to be used in the
completion of financial analysis and company valuation
After analysing Merlin’s statements their analysis cover profitability ratios, also, the firm uses
percentage and margin for carrying out comparative analysis of the financial performance.
However, the disadvantage of ratio analysis is that it is based on historical data from the
financial statements and does not account for inflation. Also, when the data is transferred
there maybe inefficiencies when comparing performance over a long period. For this reason
the financial statements of a firm can be misrepresented as ratios are not equipped to
recognise this for example, Enron’s ratios were misrepresented.
This report will use ratios to gain understanding of the quantitative dimension of the financial
assertions and will use explanation tables to judge the qualitative dimension; therefore, big
differences in the results could be explained and appropriate advice could be given.
Market Capitalisation will be assessed over a trend of five years. Discounted FCF method
will be performed to ascertain share price based on future income. The net asset method per
share (book value per share) will be used to benchmark the MC and DFCF valuations
because the book value per share has the real costs of the company but not the future
income, refer above.
Word count - 3,423
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Section 4 – Financial Analysis
Financial Analysis is the process a business undertakes to evaluate the performance and
suitability in case of a takeover. Financial analysis maybe performed to determine if an entity
is stable, solvent, liquid and profitable enough for an investment. Also, financial analysis is
performed internally to recognise common trends in performance (Saunders, 2014).
Referring to section 3 literature review, section 4 will perform financial analysis of profitability
along with ROE and ROCE, liquidity and working capital efficiency, total and non-current
asset efficiency and financial gearing of Merlin Entertainment alongside Drayton Manor park
and Blackpool pleasure beach. This approach will require the analysis of the Income
statement, balance sheet, cash-flow statement and changes in equity. For quantitative
analysis, ratios have been chosen for analysis on this project to illustrate different
associations in the financial statements that might perhaps on their own cannot identify
suitable pointers for aspects of a firm’s real performance and position (Hoskin et al. 2014 –
refer to section 3). This report will require qualitative analysis and has included explanation
tables to reflect this. Also, for all industry medians given refer to appendix 1.
4.1 - Profitability
Gross Profit Margin
2015 2016 2017
Merlin 84.90% 84.40% 84.00%
BPB 43.89% 41.44% 40.62%
DMP 59.62% 60.97% 58.48%
(For calculations and financial extracts refer to appendix 4)
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Operating Margin
Merlin
BPB
DMP
2015 2016 2017
21.70% 22.00% 20.26%
5.44% 4.18% 3.44%
-4.00% 4.06% 3.56%
(For calculations and financial extracts refer to appendix 4)
Industry Median %
Gross Profit Margins 65.9
Operating Margins 14.7
All the above expenses increased in line with the strategy, no exceptional items. Merlin’s
national turnover is £467m in 2015, and £486 in 2016 and 2017. However, their overseas
turnover has increased by (£971m/£811m) 19.7% in 2016, and (£1,108m/£971m) 14.1% in
2017 (Merlin financial statement, 2017). For revenue changes and Merlin’s key financial
data refer to section 3 graph, section 2 and below referring to total and non-current asset
efficiency. Operating margin saw a slight decrease due to COS and other expenses
increasing more than turnover, refer below to liquidity section for why COS increased. Merlin
were more efficient with operating expenses in 2016.
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Revenue has increased by 3.4% but COS have increased by 4.8%. Staff expenses have
increased in line with wage increases. Cost cutting programme was introduced in 2016 to
mitigate the wage increase effect (BPB, 2017: p3); that is why other admin expenses have
decreased in 2016 (£12,890k in 2015). Operating profit is lower in 2017, due to admin
expenses increasing as the company did not exercise cost cutting in 2017. No other
explanation is given in the financial statements. Blackpool was also affected by lower visitor
numbers, weather and industry related threats like terrorism.
Theme park revenue increased by less than one percent, and the hotel made a loss due to
occupancy levels being low.
DMP had fewer visitor numbers and were affected by industry related incidents alongside
the death of a young girl on Splash Canyon. Reasons for expenses increasing, refer below
to liquidity section. Size plays a big factor on returns from commercial operations such as,
Drayton Manor Park reporting a loss of 9.8% on accommodation due to visitor number
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falling, while Merlin saw higher growth in their accommodation returns even though their
visitor numbers decreased in 2017. Furthermore, Merlin charges lower prices than DMP on
their hotel when you would think they would charge premium prices. (DMP hotel room price
01/10/2018 £150 per person one night: Alton Towers per night £75 - 01/10/2018) refer to
appendix 4.
Merlin has the highest GP and operating profit ratio; this is due to having indoor
entertainment that bring in 60% revenue for the group, refer to section 2. However, national
turnover was static from 2016 to 2017, but having a diversity of portfolio worldwide, helps
spread costs and can mitigate losses. Also, DMP and BPB have staff costs in their COS,
before gross profits indicating a lower figure to Merlin. Merlin are above industry median on
operational efficiency suggesting good profits after expenses.
BPB and DMP have high costs and when extra ordinary costs come into play such as extra
repairs, the probability of the group making a loss is high; therefore, DMP, has a negative
operating profit. Once health and safety are at the forefront of the strategy and terrorism
scares are minimal, visitor numbers will pick up for all three companies, although all 3
companies claim Health & Safety is at the core of their strategy. However, Brexit will reduce
visitor numbers from abroad as visa restrictions come into play post Brexit. This report did
not perform net profit ratios as Merlin has different tax rates world-wide and did not want to
analyse net profits.
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4.2 - ROE and ROCE
2015 2016 2017
Merlin 24.10% 22.40% 20.60%
BPB 21.90% 20.40% 11.70%
DMP 6.60% 8.80% -10.00%
Industry Median is 10.1% for ROE (Thomas Reuters, appendix 1). ROE has reduced for all
three companies due to operating profits decreasing because expenses were higher. For
explanations of equity look at the gearing analyses table. However, Merlin have a higher
ROE than industry median, suggesting good returns. Note: No taxes have been considered
in ROE calculations, refer to appendix 4, and industry median has taxes included in ROE.
Merlin’s ROE including taxes in 2017 is 12.3% still better than industry median. For
calculations see appendix 4.
Merlin
BPB
DMP
2015 2016 2017
11.20% 10.80% 9.80%
10.60% 8.10% 6.30%
2.80% 3.70% -4.00%
(For calculations see Appendix 4)
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ROCE is even lower when debt is included. For explanations of long term debt, refer to all
the below sub-sections. All firms are highly levered, and debt is increasing year on year due
to the nature of the industry. BPB is not far behind Merlin; however, their ROCE is
decreasing faster than Merlin because their taking advantage of government secured money
and, in-turn can pay lower taxes. This is a risky strategy the company has deployed, and
there will be implications as the BEPS project come into effect. Merlin has a 9.8% ROCE,
and this means that the shareholders of the firm can reinvest a large chunk of the 9.8% back
into the company for further investments as per the strategy states.
4.3 - Liquidity and Working Capital Efficiency
This analysis will determine how solvent the companies are.
Liquidity will determine whether the short-term liabilities of Merlin Entertainment, Drayton
Manor Park (DMP) and Blackpool Pleasure Beach (BPB) are covered by liquid assets as
they fall due for payment by several calculations. For details of the calculations and financial
statements extracts see appendix 1 and 2.
Industry Median
Current ratios 0.74
Quick ratios 0.64
Working capital of the company is measured to determine if current assets can cover the
short-term liabilities if cash was needed quickly. It can be determined that DMP and BPB
have more current liabilities than current assets and are below the industry median which
suggests that firms in this industry can cover three thirds of their short-term liquidity.
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DMP has prepared their financial statements on a going concern basis because they cover
their cashflows with short-term and long-term loans that are given to them. Furthermore, the
strategic report states that -
“As is common for many cash-based businesses, the net current assets are negative,
however the directors are confident in the near future viability of the businesses levels of
cash generations are sufficient to cover the groups commitments to pay of its loans and
liabilities as they fall due” (DMP financial statements 2017: p4).
It can be stated that the company’s short-term liabilities are higher than current assets
indicate normal trading for DMP.
BPB has secured cashflow from government loans that are guaranteed, and a negative
working capital is normal trading for the group. The groups bank and deposits owed to them
in 2015 was £2,475,000, (2016, £1,171,000), and (2017, £435k). This indicates the lower
30

current assets figures and shows that the group has collected these payments (see
appendix 1 for financial statements extracts).
The current ratio of DMP improved from 0.26 in 2015 to 0.39 in 2017, this was due to an
increase in inventory, trade debtors and bank & other deposits over the years (Appendix 1
for extracts). However, increase in amounts owed to you is not good. BPB current ratio
deteriorated to 0.33 in 2015 to 0.23 in 2017 this was because of bank deposit repayments
that lowered current assets, however, suggest that money owed was paid back. BPB
normally trades with current ratio between these numbers. Referring to section 3, the
measurement of some ratios suggest that expectations are negative holds true as the
company is a going concern.
(Fame, Aston University: Library smart search).
Merlin has improved its current ratio from a negative to a positive. Merlin’s current assets
have improved, bank & deposits have increased quite a bit indicating money owed to Merlin.
Other current assets, other debtors and prepayments have all increased slightly from 2015
to 2017 (Appendix 1 for extracts). Merlin has a £300 million revolving credit facility which
they have not had the need to use (note 4.3 page 120, 2017 Financial Statements). Merlin
receives cash upfront from their annual passes which ensures a smooth positive cashflow.
This is where Merlin has a competitive advantage over DMP and BPB, even though DMP
offer annual passes, if too much passes are acquired, this could bring down profits. Current
ratio shows that merlin can pay their short-term liabilities 1.26 over and 1.15 times over if
inventory was taken out indicating a strong liquidity position. Merlin’s efficiency is above
industry median. Also, Merlin changed their strategy mid-term 2017, and used capital
allocation to their accommodation as returns and productivity were better (refer to section 2);
this could be one of the reasons of improved working capital.
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Industry Median
Inventory Turnover 17.9 times
Inventory days 20.5
Trade receivable days 24.2
Trade Payable days 59.5
Cash cycle days (16)
DMP closing inventory at the date of balance sheet varies, in 2017 it is £945k, (2016,
£810k), (2015, £568k). The increase in inventory reflects capital expenditure such as
expansion in Thomas Land and other areas as per the strategy. Cost of sales have
increased year on year, the reason for this is increase in wage cost that came into effect in
2017 (Government National Living Wage). Due to the wage increase some staff numbers
have reduced and that is why inventory turnover has deteriorated from 2015 to 2017 (DMP,
Financial Statements, 2017). DMP, is below average with their cash to cash cycle and as a
result will be paying hidden interest to their already heavily levered firm.
DMP seems to have taken on (£209,957/697,630) 232.27% more trade debtors from 2016 to
2017, and (150,289/209,957) 39.7% in 2015 to 2016 (DMP, 2017:2016: note14, p28: note
14, p26). This is not healthy as it is considered as free credit. However, better relationship
with debtors indicate long term business. The increase in payable days in 2016, suggest the
group managed cashflow by paying creditors late or a generous extension by creditors.
Merlin’s inventory has increased by £6million in 2016 and £1million in 2017, this was due to
expansions as per the strategy of the group. Cost of sales increases include expenses from
“retail inventory, food and beverage consumables and cost associated with the delivery of
accommodation” (Merlin Financial Statements, 2017: p104) (refer to section 2). Merlin’s
COS does not have staff costs included unlike DMP and BPB, and if 2017 staff cost of
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£420m was included in COS, then the inventory turnover would be (£255m + £420m / £37m)
18.2 times and the industry median is 17.9. Otherwise, it would seem that Merlin was not
efficient at inventory turnover.
Merlin has an average of 22 days to convert trade receivables into cash. Trade payables
went from 76 days in 2015 to 102 days in 2016 and decreased to 63 days in 2017. There are
no explanations in the notes for this but indicates a very good relationship with suppliers as
they are a multinational enterprise and have global suppliers the reason for very high
payback days. Cash to cash cycle is below industry median but that is fine because
advanced cashflow is averaged out during the year (refer to section 2).
BPB inventory increased by nearly £0.5m in 2016 and decreased again by nearly £0.4m in
2017. The sudden increase in the numbers were some raw materials and consumables at
the closing inventory date, there is no explanation to why, but it seems like maybe a one-off
special order (BPB, Financial Statements, 2016: note14).
BPB increased its trade debtors from £89k in 2016 to £365k in 2017 (BPB, 2017: n15: p30).
However, the increase in 2 days reflected in the above graph consist of other debtors. There
is no explanation to why there was an increase in trade debtors in 2017, however, capital
expenditure has occurred in 2017 for a double launch roller coaster named ICON that
amounted to £6.3m capital expenditure, due open in 2018 (BPB, 2017: p4). BPB have
reduced their supplier payback by 19 days in 2017 from £2,710k 2016 to £1,819k in 2017.
No explanation has been given but indicates that supplier have changed their contract terms
of re-payments, which would have affected liquidity. Cash to cash cycle is 10 days, it is
better than the other competitors, but industry median is (16) days.
Overall liquidity of DMP and BPB look bad at first glance with a negative working capital but
after closer analyses seems feasible for the foreseeable future. Merlin have a positive
working capital, but it seemed that Merlin’s inventory turnover was way below the other
competitors and after an accounting adjustment it seems Merlin was better and above
industry median. BPB are most efficient in their cash cycle, however, Merlin and DMP had
accidents at their parks 2016/2017, and it seems like they manged their cashflow by paying
the suppliers late.
33

According to the Beaver failure (1966), mentioned in section three, all firms with a beaver
ratio of less than 0.3 fail in 5 years. It seems that all three firms have failed the ratio and are
in the bankruptcy zone. The analysis of this ratio was formed in 1966 and banking terms and
conditions have changed since then suggesting the inefficiency in the ratio. However, the
firms are in the entertainment industry and may reflect the 30% of firms that the ratio does
not apply to. However, it would be advised that all 3 companies work on reducing their
burden on debt.
4.4 - Total and non-current asset efficiency
This analysis will examine how efficiently Merlin, DMP and BPB are using their total assets
and non-current assets. Total assets will look at how many units of sales revenue is
produced from each unit of total assets.
Industry Median
Asset Turnover (Revenue / average total assets of 2016+2017) 0.63
Fixed Asset Turnover (Revenue / average net PPE of
2016+2017)
3.87
(For financial statements extracts refer to appendix 1)
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DMP total asset turnover is above industry median, however when you break it down of how
much of that is generated from PP&E of the firm then the industry median suggest that it is
considerably below average, due to turnover reduction PP&E was not utilised efficiently.
Although, net non-current asset turnover is 1.73 suggesting efficiency and was due to a loan
repayment, however, fixed assets and revenue reduced as well, suggesting that this ratio
shows inefficiency, because when debt is reduced the ratio is increased regardless of
revenue and fixed assets reducing.
Merlin’s asset turnover is below industry median, however, when you break this down, their
revenue reflects their indoor and outdoor attractions which have different rates of return
(refer to section 2). Also, PP&E is below industry median, this is due to capital commitments
of £103 million not realised for the next two years. Also, group leases and buildings in
respect to Legoland Japan are included, but revenue from these will be realised in future
statements (Merlin, 2017: note 3.1 p 112). Total non-current working capital still produces
1.08 units from sales revenue. Merlin has recognised this because they changed their
strategy midterm 2017 and are investing more in accommodation than their midway
attractions as the returns and productivity is better (refer to section 2).
BPB seem the most efficient in generating revenue from their total assets and is above
industry median. BPB’s PP&E deteriorated in 2017, this is due to a £6.3m investment in
Land and Building of which £5.9m relates to assets in the course of construction, so not
35

utilised as of 2017 (BPB, 2017: p3). PP&E is below industry median; however, non-current
working capital produces 1.55 units from total revenue and is efficient. If total non-current
asset turnover is below 1.0 units then that would be worrying in terms of efficiency, as all
three companies produce over this the results don’t seem too worrying.
4.5 - Financial Gearing
Financial gearing indicates how the company is financing their liabilities. Also, how much of
long term capital is supplied by debt. In other words, if you do not have enough cash, being
profitable is not enough to survive. Financing can be raised by selling shares, or equity can
finance your debt. For calculations and extracts see appendix 3.
Industry Median
% LT Debt to Total Capital
(Gearing ratio)
22.3 %
Debt / Equity 0.53
Gearing Ratio
2015 2016 2017
Merlin 48.50% 46.30% 48.10%
BPB 48.60% 50.40% 42.70%
DMP 52.00% 55.00% 57.00%
36

Debt to Equity Ratio
Merlin
BPB
DMP
2015 2016 2017
0.94 0.87 0.95
1.89 2.23 1.81
1.26 1.35 1.59
37

(For calculations and financial extracts refer to appendix 3)
Table - Changes
Industry median gearing is 22.3% and all three firms are highly levered. Aggressive
leveraging practises are performed by all three firms and this suggests high levels of risk.
However, it is a normal trend for a regulated company to have a high gearing because they
have access to bank borrowings (Investopedia, 2018).
Merlin is better levered compared to the competitors; merlin has a worldwide portfolio and
being an MNC, takes advantage of exchange rates and other benefits. Having a certain
amount of debt reduces taxes, therefore some firms prefer having a 50/50 debt to equity.
Also, Merlin has strong relationships with some lenders and reviews the debt markets to
make sure funding is obtained on a timely basis at the right price to meet strategic growth
plans (refer to section 2). Overall gearing does not seem worrying for Merlin Entertainments.
Word count: 2,843- (industry median graphs excluded)
38

Section 5 – Business Valuations
This section will deal with different valuation methods for Merlin Entertainments. DMP and
BPB are private companies and do not have a market value, so Merlin Entertainment will be
assessed on other factors to reflect if the market has based a fair value. Market
Capitalisation (MC) is said to be a considerably quick and simple way to approximate what a
business is worth and will perform these for 5 years to interpret the movement. The income-
based approach is assessed to get a true value of the business earnings. The discounted
cash flow will be performed in the project as it is a good reflector of value created by the
company. A book value per share and P/E differences of two years will be conducted to
bench mark with FCF and MC. The dividend discount valuation is not necessary as the
company pays out positive dividends even though share price reduced in 2016 & 2017, refer
below; also, dividends do not create value they are more like the distribution of value.
2013 2014 2015 2016 2017 27/09/2018
Market Cap
History
£3,659.62m £4,004.30m £4,561.86m £4,556.92m £3,700.03m £4,088.29m
Changes in
%
- 9.42% 13.92% (0.11%) (18.80%) 10.5%
(for calculations, refer to appendix 5)
A figure on its own cannot tell the reader if the MC of a firm is good. Merlin Entertainment is
a large firm and therefore the MC is going to be large. Analysis of the MC will inspect share
price and movements, dividend payments & movements, liquidity and availability of capital;
this approach has been chosen to clarify if Merlin’s MC is positive.
The changes in MC reflect investments and loan payments & re-payments. The movements
on their own state that in 2016 there was a reduction in MC. This was due to the company
issuing extra ordinary shares as part of their group ‘s employee share incentive scheme for a
£nil consideration from 2016 and onwards (Merlin, 2017: note 4.5; p 126). Also, in 2016 to
2017 there was a drop-in expected turnover, refer to section 4.
39

In 2018 the group has picked up their share price, refer to SWOT in section 3. The increase
reflects a change in strategy towards accommodation, as better returns were reported, refer
to section 2, strategy.
Interim results June 2018 suggest the company made a profit after tax of £33m. It seems
that Merlin has improved their revenue (4.5% increase from interim 2018 results), visitor
numbers were up by 0.8% as extra security and other factors have improved for the group
(refer to appendix 5, interim extracts). Current share price is at £4, though the firms share
price dropped in 2016 and 2017, they still paid out a healthy dividend. Also, dividends are
increasing year by year indicating positive returns and good shareholder relationship.
The strategic aim of the company requires them to invest every year, as the industry they
are in demands it. Liquidity is above industry average and the group can convert short term
assets into cash within a year. Also, there is enough cash and a revolving credit facility
available for Merlin to meet their strategic aims. Currently the group is investing around
£344m as of 2018, and a £600m revolving credit facility is available immediately to the group
in-case extra funds are needed such as large repairs or investment opportunities.
40

Book value per share of Merlin is £1.53 per share (appendix 7) and the share price as at
2017 is £3.63 and has increased to £4, 29/09/2018. This is positive as the market has
valued Merlin’s assets for more than what they paid, in this instance the difference relates to
intellectual property the group has purchased (refer to section 2). However, future earnings
are not incorporated in book value per share, refer to section 3. P/E ratio for 2017 is 20.16
times and P/E ratio for 2018 is predicted 22.72 times; which means Merlin’s equity sells for
22.72 times earnings, refer to appendix 7. This figure reflects the growing share price, but
alone cannot be used to determine a fair value.
Share price movements are affected by transactional data of the company and therefore
cannot reveal the true worth of the company. Therefore, to judge the fairness of the Market
Capitalisation, future income will need to be incorporated using the discounted free cashflow
method to determine the value based on future projections.
5.1 Discounted Free Cash Flow
According to the discounted free cash flow method, the expected share price is £11.88. This
assumption was made on a growth of 6% cashflow forecasts, refer to appendix six. If Merlin
was to realistically achieve 6% growth in cashflows without affecting investments and other
factors, the company is worth more than the stock price the market has valued. This is
because the discounted FCF method has incorporated future earnings of the firm into the
value. However, a negative cashflow is not bad as it shows the company is making
investments and will reap benefits from it. Furthermore, the WACC changes with each
investment, refer to section 3.
Moreover, the discounted FCF would only reflect the true measure of value if the cash
receipts generated from the investments were matched in the same period. Therefore, the
operating cash flow must not include optimistic dates of return on each investment.
5.2 - Conclusion
share Market value
per share
Book value per
share
Discounted FCF
per share
P/E
£ £4 £1.53 £11.88 22.72 times
Value £4,088.29
million
£209m x 22.72 =
£4,748.48
million
41

Overall, Merlin’s Market Capital is increasing in line with strategy. However, the book value
per share of Merlin stands at £1.53 in 2017, this is because the true value of intellectual
property is not incorporated. The P/E ratio has increased which is positive but is still below
the industry P/E which is 46.74 (refer to appendix 7), however, P/E ratio is used as an
indicator not a value, refer to section 3. There is a difference of nearly £600m between the
MC and P/E value of the firm, which is roughly the same as both figures are over £4 billion.
P/E does give a higher value due to the ratio having inconsistencies, refer to section 3.
The company pay positive dividends that are not affected by the market share price
movements. Discounted FCF per share is higher because future earnings are incorporated,
and if the company can grow its FCF by 6% per year, £11.88 per share is the true reflection
of Merlin’s share price.
Overall, the market has valued the firm at £4.09 billion. This figure has increased, and it is
fair to say that the prospects of the company look positive and are increasing in line with
strategy, that changes throughout the year to achieve better results. According to the above
analysis it would be profitable if an investor was to buy shares today as the stocks will be
increasing in the foreseeable future.
Word count: 1,148
42

Section 6
6.1 - Conclusions and Recommendations for Merlin Entertainments
Merlin Entertainment is a multinational corporation and comes with global challenges. The
strategic report states that the firm is very strong. The firm has six strategic growth drivers to
hit by 2020. Moreover, Mid-term 2018 the group diverted their investments towards
accommodation for better returns in the U.K. The firm has advance cash flows that is
averaged throughout the year, so costs can be met. The SWOT revealed issues with
weather, health and safety and terrorism which indicated a loss may be made in the U.K.
After a breakdown of revenue revealed in section 4, it stated that the company had an
increase in their global portfolio revenue and static results in the U.K. However, after
reviewing 2018 interim results visitor numbers are creeping up. Merlin’s has more positive
factors than negative, and if they keep up with their strategy, profits look positive going
ahead if there are no issues with health & safety and terrorism.
Merlin’s
performance
2017 Change from
past trends
Performance
with
competitors
Industry
Median
Performance
with Industry
median
Gross Profits 84 % Decreased
slightly
65.9%
Operating Profits 20.26 % Decreased
slightly
14.7%
ROE 12.3 % Decreased
slightly
10.1 %
ROCE 9.8 % Decreased
slightly
- -
Working Capital £92 million Increased to
positive
- -
Current Ratio 1.26 times Increased
slightly
0.74
Quick Ratio 1.15 times Increased
slightly
0.64
Inventory
Turnover
18.2 times
(after accounting
adjustment, refer
to section 4)
Increased
slightly
17.9 times
43

Total Asset
Turnover
0.44 static 0.63
Net Non-current
asset turnover
1.08 times Increased
slightly
- -
PP &E 0.76 times Decreased
slightly
3.87 times
Gearing 48.1 % Increased 22.3 %
Debt to Equity 0.94 times Increased 0.53 times
Merlin’s GP and operating ratios are all above industry median, however, the ratios have
decreased from previous years due to static turnover in the U.K which had a ripple affect on
most of the ratios calculated in section 4. Turnover had impacted ROE and ROCE as well,
but the company is increasing their debt yearly. Cash flows from investments made may
have a payback period of two or three years, so profits from investments will be realised
looking forward.
Current and quick ratios are impressive for Merlin, however, after an accounting adjustment
the inventory turnover is about the same as industry median. Furthermore, the companies in
the industry median may or may not have staff costs included in their COS, and the industry
median may have inefficiencies. It seemed Merlin would have a higher inventory turnover,
but the opposite was realised. This maybe because Merlin offers discounts and free refill
drinks with some of their annual passes and visitors are utilising these more than expected.
If Merlin was to reduce some perks their inventory turnover will improve slightly but customer
satisfaction would reduce.
Total asset turnover is below competitors and industry median. Drop in expected revenue
has affected this ratio. Merlin’s assets include indoor and outdoor entertainment with
different rates of return from different geographical areas. Also, they own the Legoland
branding in their fixed assets that will generate profits as they grow. DMP and BPB are
smaller in size and can generate their assets into revenue faster than Merlin, the reason
their ratio is higher.
Net non-current asset turnover for Merlin is below competitors because both competitors
reduced their debt in 2017 while Merlin increased their debt. Also, the PP&E for Merlin is
below industry and competitors. Competitors are smaller as mentioned and can turnover
their investments pretty much straight away, where it may take Merlin longer due to their
44

sheer size. Also, PP&E was not utilised as planned due to visitor number decreasing and
group leases & buildings in respect to Legoland and other capital commitments realised in
two years times are included in the PP&E (refer to section 4). It seems the low PP&E is not a
bad thing.
Industry Median debt to
equity.
Merlin’s gearing is better than competitors because DMP & BPB are smaller in size and as a
result are heavily debt reliant as the industry requires investments every year. However,
Merlin is below industry median with their capital structure. Firms in this industry operate with
a debt to equity structure of 22.3%, which is considered safe. However, Merlin is a global
company and a 50/50 capital structure does not seem worrying as they can pay lower taxes,
but high gearing is also considered as not safe.
After closer analysis, Merlin’s operations for the foreseeable future according to ratios and
their explanations look positive only if they are quick to react to change and are not affected
adversely by the external environment.
share Market value
per share
Book value per
share
Discounted FCF
per share
P/E
£ £4 £1.53 £11.88 22.72 times
Value £4,088.29
million
£209m x 22.72 =
£4,748.48
million
Merlin’s book value per share is lower than market per share due to intellectual properties
true worth not identified under book value. In the case of a liquidation a higher book value
states the share has more liquidation value, however, Merlin are a going concern.
45
22.30%
77.70%
1 2

The DFCF suggests on a growth rate of 6% on free cash flows the share price is £11.88, this
is due to the DFCF incorporating future earnings over 5 years. However, the market price of
£4 per share does not reflect the true future earnings, the reason it is lower. Nevertheless,
after playing around with the DFCF calculations this report states suggestion to realise the
projected share price of £11.88.
Merlin’s dividend payments are around £74m in 2017. If Merlin was to stop paying dividends
for the next 5 years and reinvest that money into the free cash flows to reflect the 6%
growth, then the share price of £11.88 is realistic. This will be dependant on the growth of
4% calculated in appendix 6 to be realised and the WACC will change with each investment.
Merlin need to appraise their investments to a WACC of around 4.6% for the following
recommendation to be successful.
However, the shareholders will not be very happy. Merlin could hold a shareholder meeting
and discuss the figures (internal, after all considerations are factored). Current share price is
£4 and future price per share could rise sharply, so the shareholders are not losing out but
are increasing their share price drastically in a period of 5 years. Also, if dividends were used
instead of bank loans then interest paid out will be less resulting in more money for Merlin.
According the DFCF method, if Merlin was to increase their debt by £1000m the share price
would be £10.72 which is not much of a difference but in real life that would mean a higher
gearing and the firm is already considered highly geared.
46

2017 2018 F 2019 F 2020 F 2021 F 2022 F
Free cashflow (FCF) 70.00 74.20 78.65 83.37 88.37 93.68
Beyond 2022 at 4% Growth 4.00% 15,970.95
Discounting (WA CC) 0.95593 0.91381 0.87354 0.83504 0.79824
Present Value (PV) 70.93 71.87 72.83 73.80 12,823.45
Sum of PV 13,112.87
Net Debt 2,160.00-
Value - Sum to Equity holders 10,952.87
Number of shares 1022
Expected share price of Merlin 10.72
Merlin's Share price as at 29th Sep 2018 4.00
Discounted Free Cash Flow Model (DFCF)
Merlin could mess around with the above figures to receive the desired results based on
internal calculations for a more achievable view point. The calculations can be put through a
spreadsheet with DFCF calculations formula. This report has concluded that Merlin
Entertainment will continue to grow and is considered as a safe investment.
Word Count 1057 without rating table
47

Appendix
Appendix – 1
Balance sheet for DMP and BPB
48

49

1.1 Balance Sheet for Merlin – 2015, 2016 and 2017
50

1.2 - Income Satatements for Merlin 2015,
2016 and 2017
51

1.3 - Income statements for DMP 2015, 2016 and 2017
52

1.4 - Income Statement for Blackpool Pleasure Beach 2015, 2016 and 2017 results
1.5 Cashflow Statements of DMP, BPB and Merlin
53

1.6 - Industry Medians-
Eikon Software installed at Aston, room 522. Eikon software gave me access to Thomson
Reuters Eikon, which is a credible software to obtain my Industry medians and other figures.
Thomson Reuters claim they deliver the highest quality standards, data we can trust, timely
and accuracy of data, and has data on 70% of the market. I will be basing my analysis
according to Thomson Reuters (Thomson Reuters, 2018).
54

Appendix 2 –
2.1 - Liquidity, Working Capital Efficiency and Total and Non-Current Asset Efficiency
Calculations
Working Drayton
Manor Park
Merlin
Entertain
ments
Blackpool
Pleasure
Beach
2017 £ 2016 £ 2015 £ 2017
£m
2016
£m
2015 £ 2017 £ 2016 £ 2015 £
Working
Capital
Current
asset minus
current
liabilities
2,527,957 -
6,529,925=
(4,001,968)
2,074,749 -
5,908,556 =
(3,833,807)
1,4,11,397 -
5,458,192 =
(4,046,795)
451m –
359m =
92 million
340m –
352m =
(12million)
260m –
266m =
(6million)
3,527,000 -
15,162,000 =
(11,635,000)
4,462,000 -
13,933,000
=
(9,471,000)
5,037,000 -
15,196,000 =
(10,159,000)
Current ratio Current
assets/Curre
nt liabilities
2,527,957 /
6,529,925=
0.39
2,074,749 /
5,908,556 =
0.35
1,4,11,397 /
5,458,192 =
0.26
451m /
359m =
1.26
340m /
352m =
0.97
260m /
266m =
0.98
3,527,000 /
15,162,000 =
0.23
4,462,000 /
13,933,000
= 0.32
5,037,000 /
15,196,000 =
0.33
Liquidity-
Quick ratio
Current
assets -
inventory/Cu
rrent
liabilities
2,527,957 –
945,789 /
6,529,925=
0.24
2,074,749 –
810,977 /
5,908,556 =
0.21
1,4,11,397 -
568,068 /
5,458,192 =
0.15
451m –
37m /
359m =
1.15
340m –
36m / 352m
=
0.86
260m –
30m /
266m =
0.86
3,527,000 –
1,289,000 /
15,162,000 =
0.15
4,462,000 -
1,711,000 /
13,933,000
= 0.19
5,037,000 –
1.312,000 /
15,196,000 =
0.25
Inventory
Turn-over
Cost of
sales /
invenotry
10,345,007 /
945,789 =
10.9 times
9,890,178 /
810,977 =
12.1 times
9,362,639 /
568,068 =
16.5 times
255m /
37m =
6.9 times
227m / 36m
=
6.3 times
193m /
30m =
6.4 times
19,829,000 /
1,289,000 =
15.4 times
18,914,000
/ 1,711,000
= 11 times
18,806,000 /
1,312,000 =
14.3 times
Inventory turn-
over period
Inventory x
365 / cost of
sales
945,789 x 365
/ 10,345,007 =
34 days
810,977 x 365
/ 9,890,178 =
30 days
568,068 x
365 /
9,362,639 =
23 days
37m x 365
/ 255m =
53 days
36m x 365 /
227m =
58 days
30m x
365 /
193m =
57 days
1,289,000 x
365 /
19,829,000 =
24 days
1,711,000 x
365 /
18,914,000
= 34 days
1,312,000 x
365 /
18,806,000 =
26 days
Trade
Revievables
Trade
recievables
x 365 /
Revenue
1,379,249 x
365 /
24,916,796 =
21 days
1,164,044 x
365 /
25,341,113 =
17 days
755,262 x
365 /
23,188,618
= 12 days
100m x
365 /
1,594m =
23 days
86m x 365 /
1,457m =
22 days
76m x
365 /
1,278m =
22 days
1,803,000 x
365 /
33,396,000 =
20 days
1,580,000 x
365 /
32,298,000
= 18 days
1,250,000 x
365 /
33,519,000 =
14 days
Trade
payables
Trade
payables x
365 / cost of
sales
916,623 x 365
/ 10,345,007 =
33 days
1,599,431 x
365 /
9,890,178 =
60 days
958,285 x
365 /
9,362,639 =
38 days
44m x 365
/ 255m =
63 days
63m x 365 /
227m =
102 days
41m x
365 /
193m =
76 days
1,819,000 x
365 /
19,829,000 =
34 days
2,710,000 x
365 /
18,914,000
= 53 days
2,668,000 x
365 /
18,806,000 =
52 days
Cash to cash
cycle
Inventory
turnover +
recievables
settlement –
payables
settlement
34 days + 21
days – 33
days =
22 days
30 days + 17
days – 60
days =
-13 days
23 days +
12 days –
38 days =
-3 days
53 days +
23 days –
63 days =
13 days
58 days +
22 days –
101 days =
-21 days
57 days
+ 22 days
-76 days
=
3 days
24 days + 20
days – 34
days =
10 days
34 days +
18 days –
53 days =
-1 day
26 days + 14
days – 52
days =
-12 days
Total asset
turnover
Revenue /
Total assets
24,916,796 /
32,801,788 =
0.76
25,341,113 /
33,715,791 =
0.75
23,188,618 /
34,809,589
= 0.67
1,594m /
3,664m =
0.44
1,457m /
3,298m =
0.44
1,278m /
2,735m =
0.47
33,396,000 /
33,275,000 =
1.00
32,298,000
/
30,647,000
= 1.05
33,519,000 /
32,372,000 =
1.04
Net non-
current asset
turnover
Revenue /
Net non-
current
assets
24,916,796 /
(30,273,831 –
15,860,790) =
1.73
25,341,113 /
(31,641,042 –
16,184,767) =
1.64
23,188,618 /
(32,618,140
-
16,825,259)
= 1.47
1,594m /
(3,213m –
1,742m )
=
1.08
1,457m /
(2,958m –
1,522m) =
1.01
1,278m /
(2,475m –
1,324m) =
1.11
33,396,000 /
(29,748,000 –
8,278,000) =
1.55
32,298,000
/
(26,185,000
–
10,099,000)
= 2.00
33,519,000 /
(27,335,000 –
8,841,000) =
1.81
PP & E
Turover
Revenue /
Net PP & E
24,916,796 /
30,200,708 =
0.83
25,341,113 /
31,546,732 =
0.80
23,188,618 /
32,490,307
= 0.71
1,594m /
2,092m =
0.76
1,457m /
1,841m =
0.79
1,278m /
1,495m =
0.85
33,396,000 /
25,725,000 =
1.30
32,298,000
/
22,456,000
= 1.44
33,519,000 /
23,279,000 =
1.44
All calcualtions are taken from Hillier, 2016. Chapter 2,3 and 26.
55

Appendix 3
3.1 - Financial Gearing
Gearing ratio and debt to equity ratio
command Merlin BPB DMP
2017
£m
2016
£m
2015
£m
2017
£000
2016
£000
2015
£000
2017
£
2016
£
2015
£
Financial
Gearing
LT debt /
LT debt +
equity
1461 /
1469
+
1567
=
0.481
1235 /
1240
+
1428
=
0.463
1085 /
1089
+
1149
=
0.485
7353 /
7353 +
9835 =
0.427
6729 /
6729
+
6615
=
0.504
7899 /
7899
+
8335
=
0.486
14,041,90
0 /
14,041,90
0 +
10,411,07
3 =
0.57
14,176,23
0 /
14,176,23
0 +
11,622,46
8
=
0.55
13,578,361
/
13,578,361
+
12,526,138
=
0.52
Debt to
equity
ST debt +
LT debt /
shareholde
r equity
8 +
1461 /
1563
=
0.94
5 +
1235 /
1424
=
0.87
1085 /
1145
=
0.95
10,537
+ 7353
/ 9835
=
1.81
8,025
+
6729 /
6615
=
2.23
7,932
+
7899 /
8335
=
1.89
2,513,844
+
14,041,90
0 /
10,411,07
3 =
1.59
1,488,108
+
14,176,23
0 /
11,622,46
8 =
1.35
2,158,036
+
13,578,361
/
12,526,138
=
1.26
(for calculations, Hillier,2016; chapter 3 and 16).
3.2 – Merlin calculations
Gearing ratio
Long term debt consists of total long-term debt of (£1,461m). Equity consist of total equity
£1,567m + total debt includes, £1,461m + interest bearing loans and borrowings £7m and
finance leases of £1m which can be found under current liabilities; these are the interest
payable on loans and are important to add to debt. 2016 and 2015 are worked out the same
way, for more information refer to financial statements extracts above.
Debt to Equity ratio
Long term debt and short-term debt in the calculations consist of other long-term loans and
hire purchase and lease payments from long term and short-term liabilities, extracts in
appendix 1. The debt to equity ratio, shareholder equity excludes non-controlling interest
share of equity.
3.3 – BBP calculations
Long term debt consists of long-term loans. Short term loans consist of bank term loans +
other loans + loans from self-administered pension scheme + amounts due to related
undertakings.
56

3.4 – DMP calculations
ST debt consist of bank loans and overdrafts, finance loans, finance lease and hire purchase
obligations and other loans. LT debt consist of bank loans, finance loans, finance lease and
hire purchase obligations and derivative financial instruments.
57

Appendix 4
4.1 - Profitability Ratios
Income Satatements for Merlin 2015, 2016 and 2017
Operating profit for Merlin in 2015, consist of a cahflow hedge – reclaissified to profit and
loss of £14m as shown in the above extract. The £14m is subtracted from 2015 operating
profit (£291m - £14m = £277m).
4.2 - Calculations for profitability
58

Working Merlin
Entertainme
nts
Drayton
Manor
Park
Blackpool
Pleasure
Beach
2017 £m 2016 £m 2015 £m 2017 £ 2016 £ 2015 £ 2017
£000
2016
£000
2015
£000
Operating
Margin
Op Profits /
Total
Revenue
323 / 1,594 x
100 =
20.26%
320 / 1,457 x
100 =
22 %
277 / 1,278
x 100 =
21.7%
(1,060,204)
/
24,916,796
x 100 =
(4.25)
1,028,192 /
25,341,113
x 100 =
4.06%
825,408 /
23,188,61
8 x 100 =
3.56 %
1,148 / 33,396
x 100 =
3.44 %
1,350 /
32,298 x
100 =
4.18%
1,823 / 33,519
x 100 =
5.44%
Gross Profit
ratio
GP / Sales
Revenue
1,339 / 1,594
x 100 =
84 %
1,230 / 1,457
x 100 =
84.4%
1,085 /
1,278 x 100
=
84.9%
14,571,789
/
24,916,796
x 100 =
58.48%
15,450,935/
25,341,113
x 100 =
60.97%
13,825,97
9 /
23,188,61
8 x 100 =
59.62%
13,567 /
33,396 x 100
=
40.62%
13,384 /
32,298 x
100 =
41.44%
14,713 /
33,519 x 100
=
43.89 %
Return on
Equity
Op Profits /
Equity
323 / 1,567 =
20.6 %
320 / 1,428 =
22.4%
277 / 1,149
=
24.1%
(1,060,204)
/
10,411,073
=
(10%)
1,028,192 /
11,622,468
=
8.8%
825,408 /
12,526,13
8 =
6.6%
1,148 / 9,835
=
11.7%
1,350 /
6615 =
20.4%
1,823 / 8,335
=
21.9%
Return on
Capital
Emplyed
Op profits /
Equity +
Long term
liabilities
323 / 1,567 +
1,742 =
9.8 %
320 / 1,428 +
1,522 =
10.8%
277 / 1,149
+ 1,324 =
11.2%
(1,060,204)
/
10,411,073
+
15,860,790
=
(4%)
1,028,192 /
11,622,468 +
16,184,767=
3.7%
825,408 /
12,526,138
+
16,825,259
=
2.8%
1,148 / 9,835
+ 8,278 =
6.3%
1,350 /
6615 +
10,099 =
8.1%
1,823 / 8,335
+ 8,841 =
10.6%
(Hillier,2016; chapter 3 pg 78).
4.3 - ROCE for Merlin with taxes in 2017 –
(Net income before taxes – provision for income taxes = £271m - £87m = £184m) / (Average
total equity = £1,563m + £1,424m / 2 = £1,494)
184 / 1494 = 12.3 %
4.4 - Income statements for DMP 2015, 2016 and 2017
59

4.5 - Income Statement for Blackpool Pleasure Beach 2015, 2016 and 2017 results
4.6 – DMP and Merlin extracts for hotel prices
60

Apendix 5 – Business valuation calculations
Equity Multiplier 2017 £m 2016 £m
Total Assets / Equity 3,664 / 1,563 = 2.34% 3,298 / 1,424 = 2.32%
2017 £m 2016 £m Why Indicates
Cashflows from
Operating
activities
363 374 Decrease due to extra
costs reported, refer to
section 4.
Positive
good
Cashflow outflow
from Investing
activities
(344) (288) As per the strategy Negative
Good, because
suggest investments
were made
Cash flow from
Financing
activities
142 2 £140m has been
borrowed by the bank
since 2017.
Positive
Good, because debt
was needed for
investments and
operations, however,
too much debt is not
good
Increase
(Decrease) Cash
& Equiv
90 40
Merlins market capitalisation as of 27/09/2018 is $4.09 bn.
Market Capitalisation 27/09/2018
Outstanding shares 1,022,072,449 x
Stock price £4.00 =
Market Cap £4.09 bn
Market Capitalisation over 5 years
2013 2014 2015 2016 2017 27/09/2018
Market
Cap
History
1,014m x
£3.61 =
£3,659.6
2 m
1,014m x £3.95 =
£4,004.30
m
1,014m x £4.50 =
£4,561.86
m
1,016m x £4.49 =
£4,556.92
m
1,020m x £3.63 =
£3,700.03
m £4,088.29
m
Change
s in %
- 9.42% 13.92% (0.11%) (18.80%) 10.5%
2013 2014 2015 2016 2017 27/09/2018
Share
Price
£3.61 £3.95 £4.50 £4.49 £3.63 £4.00
% change - 9.42 % 13.92 % (0.22 %) (19.15%) 10.19 %
Dividend
payment
£20m £64m £67m £74m 30th June
2018
£51m
(interim dividend)
% change 220 % 4.69 % 10.45 % (£51m/£74m) /12
x 6 months =
3.4 %
Liquidity-
quick ratio
1.24 times 1.26 times 0.86 times 0.86 times 1.15 times CA - inventory /
CL
£313m - £52m /
61

-
(financial
stability)
£459 = 0.57 x
12 / 6months =
1.14 times
Availibility
of
additional
Capital
Cassh and
cash
equivalent
s
£300m
revolving
credit
facility.
£300m
revolving
credit
facility.
£309m
£300m
revolving
credit
facility.
£215m
£600m
revolving
credit
facility.
£117 x
12months /
6 months =
£234m
(refer to
extracts below)
Refer to liquidity ratios in appendix 2.
5.1 – Merlin interim 2018 cashflow extracts
Interim Cash and cash equiv, and £600m revolving credit facility.
62

5.2 - Extracts from Interim statements of Merlin, 2018.
63

5.3 - Interim 2018 revenue growth of 4.5%
Appendix 6 – Discounted free cash flow calculations
Discounted free cash flow method requires a CAPM-
Risk free rate is taken from Bloomberg, 5 year government bond as at 29/09/2018 is 1.16%.
The FTSE all shares index from the Russell fact sheet is used to take the average market
return for 5 years. All shares index captures more than 98% of the capital of all companies
listed on the London stock exchange, hence a market index measure (FTSE Russell, 2018).
Market return for 5 years 7.6% as at 29/09/2018.
The beta can be taken from a wide range of sources.
The Financial Times Beta 0.7240 – 29/09/2018
Thomson Reuters Beta 0.72 – 29/09/2018
64

(Taken from Aston, Financial Analysis BFM241, week 6 power point).
Cost of Equity
Ke = Rf + beta (Rm – Rf)
1.16 + 0.72 ( 7.6 – 1.16) =
5.80 %
6.1 - Extracts for CAPM
65

Beta for Financial Times
Beta from Thomson Reuters
66

6.2 - Growth rate calculation for free cash flow
There are many ways to ascertain a growth rate. Return on capital invested is the actual
returns after the WACC of a company that the shareholders receive. Earnings retention is
the percentage the company retains, known as reserves. These two figures multiplyed by
each other can indicate a growth rate representative of the company. The mean of 5 years
will give a future predicted growth rate.
2013 % 2014 % 2015 % 2016 % 2017 %
ROIC x 6.2 6.6 6.8 7.8 5.9
Earnings
Retention
1.00 0.61 0.61 0.66 0.59
= Growth
Rate
6.2 4.026 4.148 5.148 3.481
Average growth rate = 6.2 + 4.026 + 4.148 + 5.148 + 3.481 / 5 = 4.0 %
ROIC and Earnings Retention was taken from Thomson Reuters and the extract is below
67

6.3 - Second method to ascertain growth rate
A growth rate can be determined by dividing current trailing P/E by 5 year expected PEG
multiple. This figure gives a 5 year EPS expected growth rate.
(Taken from Aston, Financial Analysis BFM241, week 7 power point).
I could not find PEG 5 years for Merlin, however, Reuters have given me a 5 year EPS
growth of 19.23 %. This figure is very high so I will not be using it as it will not reflect the
true nature of the company as EPS and free cash flows are different.
6.4 - WACC for Merlin
Cost of debt (pre-tax): Net Interest expense / Net debt
2017
Net interest paid is £46m – Net interest received £1m = Net Interest expense £45m (2017,
cashflow).
Net debt is (£1,160m) (Merlin, 2017 financial statements:Note 4.1, page 119)
Cost of debt = £45m / £1,160m = 3.9%
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I will use the effective tax rate for merlin which is 22.9%
Cost of debt = pretax cost of debt x (1 – tax rate)
3.9 x 0.771 = 3.0 %
(Taken from Aston, Financial Analysis BFM241, week 6 power point).
CAPM= Ke 5.80%
Net debt = £1,160m
Equity = £1,563m
Kd = 3.0% with tax
(ke E / D + E) + (Kd D / D + E) =
(5.8 x 1,563 / 1,160 + 1,563) + ( 3 x 1,160 / 1,160 + 1,563) =
3.33 + 1.28 = 4.61%
69

6.5 – DFCF calculation
I have assumed that the cashflow forecast is growing by 6%.
Discounted Free Cash Flow Model (DFCF)
2017
£m
2018 F
£m
2019 F
£m
2020 F
£m
2021 F
£m
2022 F
£m
Free cashflow (FCF)
6% growth forecast
assumption
70.00
74.20 78.65 83.37 88.37 93.68
Beyond 2022 at 4%
growth
4% 16,196.5
1
Discounting (WACC
4.61%)
0.95601 0.91395 0.8737
5
0.83531 0.79857
Present Value (PV) 70.94 71.88 72.85 73.82 13,008.7
7
Sum of PV 13,298.2
6
Net Debt
1,160.00
Value - Sum to
Equity holders
12,138.2
6
Number of shares 1022
Expected share price
of Merlin
£11.88
Merlin's Share price
as at 29th Sep 2018
£4.00
(Calculations from Hiller, 2016: chapter 4)
Appendix 7
7.1 - Book Value of Merlin Entertainment
The book value is all assets minus liabilities and times by the shares outstanding (Hiller,
2016; pg 378).
2017 financial statements
Net assets / shares outstanding
£1,563m / 1,022,072,449 = £1.53 per share
7.2 - P/E ratio
Price per share / Earnings per share (Hiller, 2016; pg 79).
2017 financial statements -
£3.63 / 0.18 = 20.16 times
2018 P/E ratio is 19.38 times, but the financial year has not ended and Reuters believe that
P/E ratio (TTM) is 22.72. The industry P/E median is 46.74, refer below.
70

Taken from Fame, Aston University, see extract below -
71

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