Monday, May 12, 2014

L.A.M. on whether the Singapore Flyer is worth S$240 million.

Last week we heard, that the world's second tallest Ferris Wheel didn't manage to convince Merlin Entertainments, the British firm behind the London Eye and Legoland theme parks to acquire it for S$240million.

Singapore Flyer’s woes take a new spin after Merlin talks collapse

When I heard about this news, one of the first things that came to my mind whether the price tag is too high for a giant revolving shape that has a circumference that follows the properties of 2πr.

In order to answer the above question, I decided to do some back of the envelope calculations to find out. Based on 2013 numbers. Merlin Entertainments PLC had an net margin of 12.2% and an ROA of 5.6%

The ROA is the return on asset and is a measure calculated by dividing the Net Income over Total Assets. Since, the asset in question here is the Singapore Flyer and the price tag is $240m. In order not to dilute it's ROA of 5.6%. Merlin Entertainments PLC needs a net income of $13.44m annually to justify purchasing the Singapore Flyer.

The Net Margin is a measure of the Net Income against Total Revenues. At 12.2%, this means that assuming that the Singapore Flyer has a similar Net Margin as the Merlin Entertainments PLC, a Net Income of $13.44m translates to a Revenue of S$110.16m annually.

The Singapore Flyer is a 28 cabin ride which can hold 28 people and operates 16 hours a day. At 37min per cycle, the Singapore Flyer has a maximum capacity 21,952 persons per day or an annual maximum capacity of slightly more than 7.4 million riders. In order to meet the numbers, the Singapore Flyer needs to make $14.89 per person, assuming 100% capacity.

Now let's look at some assumptions. Realistically, attracting 7.4m riders is a tall order. The London Eye, the most popular Ferris Wheel attracts on average 4m visitors a year. Assuming, that somehow, through marketing efforts, synergies, etc, the Singapore Flyer can attract 4m riders a year, the revenues per person required increases to $27.54.

Now , the big question is how much would 4m visitors a year be willing to pay for a 37min ride in a flyer attraction. I did a quick survey and tried to rank various entertainment activities by price

Watching a Movie: $8.50.
Good for 2 hours of entertainment. $4.25/hr.
Universal Studios Singapore: $66. Good for 8 hours of entertainment. $6.60/hr
Marine Life Park: $38. Good for 4 hours of entertainment. $9.50/hr
Adventure Cove Water Park: $36. Good for 4 hours of entertainments. $9/hr

Now at $33 for the Singapore flyer, the pricing is definitely too high for 37min - 1 hr of entertainment value. A more reasonable price would be $5-$9. However, for the purpose of this analysis, I will be a little bit more generous and assume the reasonable price for adult tickets to be $12 and $6 for child tickets in order to attract 4m visitors a year.

Assuming a 2:1 adult to child ratio, the average revenue from Flyer ticket sales per person would be $11. And assuming that the Singapore Flyer on average can attract a dollar for dollar in peripheral revenues from gift shops, rental, special occasions, etc, this puts revenues per person at $22.

Working backwards from this magical number of $22, the ideal price tag for the Singapore Flyer is around $191.71m. As such, at $240m, the Singapore Flyer is overpriced. A more reasonable asking price would be $190m.

No comments :