Merlin jumps on hopes over hotel expansion plans

Merlin Entertainments had its best day in nine months on Wednesday after Morgan Stanley said investors had missed its hotel expansion plans.

The Alton Towers operator has 3,600 rooms available at 20 hotels with a target of adding a further 2,000 rooms by the end of the decade so half its theme park visitors can stay overnight.

Morgan Stanley saw the target as overly conservative, saying that at the current expansion rates Merlin could have 7,000 rooms available by 2022.

Adding a hotel turns a theme park into a national destination with benefits to on-site spending and reduced exposure to poor weather, said Morgan Stanley.

And while Merlin’s hotel estate is much smaller than sector peers, it is making £324 a night from each occupied room, which suggests hotels already account for about a fifth of group ebitda, the broker estimated.

Newer hotels are even more valuable with Legoland room-and-ticket packages currently averaging £450 a night, Morgan Stanley said.

The premium rates charged mean lodging alone can add 5 per cent to Merlin’s annual earnings growth, which justifies a £10 share price by 2022, it forecast.

Merlin closed up 2.9 per cent at 499.7p in a buoyant leisure sector, which was helped by US hotelier Wyndham raising earnings guidance. InterContinental hit a record high, up 1.9 per cent to £40.61.

The FTSE 100 rose 0.2 per cent, up 13.08 points, to 7,288.72. Standard Chartered was its biggest gainer, up 4 per cent to 757.3p, after its earnings beat expectations thanks to cost-cutting and “unusually low” loan impairments.

Aggreko rose 5.7 per cent to 904.5p a day ahead of a trading update. The generator hire specialist, which last month warned on profits, is expected to flag up signs of improving demand from US oil and gas producers.

Brick maker Ibstock lost 2.4 per cent to 220.5p following news that Bain Capital had placed its entire 25 per cent shareholding at 215p apiece, having initially aimed to sell about half the holding.

Retailer Next drifted 0.7 per cent to £42.43 on a downgrade to “underperform” from Jefferies.

Warm weather in March might have helped Next’s sales but the challenge to regain its competitive edge amid rising inflation, weak consumer confidence and a shift to leisure spending is as tough as ever, said Jefferies.

The broker forecast Next’s earnings to drop nearly 20 per cent between 2017 and 2019, which it said undermined the attraction of an 8 per cent dividend yield.

Severn Trent eased 1 per cent to £23.05 after HSBC turned negative. A coming price review by water regulator Ofwat will test financial resilience, which leaves Severn Trent the most exposed within the sector due to its pension liability and network investment shortfall, HSBC said.