Manchester United Equity Story

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A short story documenting the outlook for Manchester United, one of the world's greatest football clubs from a business perspective. We discuss its evolution as a leading sporting institution to a global media brand since its initial public offering in 2011.

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  • MANCHESTER UNITED

    MATERIALS FOR DISCUSSION

  • Table of Contents Executive Summary Consumer Industry Overview

    Company Considerations Share price performance Recent Corporate Actions Operating Performance Valuation

    Trade Idea

  • EXECUTIVE SUMMARY This presentation evaluates the consumer services industry in which Manchester United (Man U) operates

    In this analysis, I have identified the fundamental drivers of the industry and company evaluate the intrinsic price of Man Us shares using a fully integrated financial statements forecast model and discounted cash flow valuation

    I have observed the following key drivers with respect to the companys operating performance:

    MANU Is revalidated its brand through successful long term annuity deal with Chevrolet despite not qualifying for the Champions League in FY15

    Expect the commercial segment to generate over 50% of sales over the next five years Man U has continued to improve its financial position through operational and financial improvements

    Traditional revenue streams will be overtaken by commercial segment which includes sponsorships and marketing

    Gearing ratios expected to decline annually from FY14-18E

    Over the last 12months, the companys share price has remained stable relative to its consumer brands competitors including Tumi, Hermes and Michael Kors

    On a DCF basis, the company is intrinsically valued at $21,6 per share. Manchester United shares are currently trading on the New York Stock Exchange at a discount: $18,7 per share implying potential value upside of 16,1%

  • CONSUMER INDUSTRY OVERVIEW

  • Company Description Manchester United is one of the most popular and successful sports teams in the world playing the most popular sport: football. The team was founded in 1878 and has a track record of success on the field which has led it to become a powerful brand with a global community of 659 million followers. This significant global community provides Manchester United with a worldwide platform to generate significant revenue from multiple sources including:

    Sponsorship Merchandising, Product licensing, New media & mobile, broadcasting Matchday

  • Man U - Competitive Landscape

    High Growth Consumer Brands Hermes Under Armour Lululemon Michael Kors Tumi

  • Sponsorship Strengths

    Brand Ownership

    Control of intellectual property and brand

    Direct relationships with partners

    Innovation of Rights

    Broad sponsorship assets

    New rights and platforms

    Geographic segmentation to protect exclusivity

    Data and Insights Driven Culture

    Analytical framework

    Independent data sources and verification

    Fan data and segmentation, TV audience data, web analytics

    Professional Approach

    Rigorous prospecting and research

    Premium sales packs and presentations

    Professional marketing support

  • SWOT Analysis Brand value Chevrolet deal in FY 14 Strong player base 650 m loyal fan base

    Strengths

    Did not qualify for the Champions League New manager Poor playing performance No Nike Deal renewal

    Weaknesses

    Champions league qualification next season Van Gaal Secured new contract with Wayne Rooney

    Opportunities

    Brand value distraction Social media strategy underperformance Threats

  • COMPANY CONSIDERATIONS

  • Key Company Considerations

    MANU Is revalidated its brand through successful long term annuity deal with Chevrolet

    Expect the commercial segment to generate over 50% of sales over the next five years

    Deleveraging: Man U continues to improve its capital structure

    Social Media Strategy requires significant investment

    Player wage growth inflation Nike deal not renewed

  • Share Price Performance vs Competitors (Last 12 Months)

  • Financial Forecasts EBIT & Margin (14-18)

    Profit & Margin (14-18) Sales & Growth (14-18)

    431.1 418.7

    533.4

    617.3 640

    18.7%

    -2.9%

    27.4%

    15.7%

    3.7%

    -5%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    200

    300

    400

    500

    600

    700

    2014E 2015E 2016E 2017E 2018E

    Sales Growth (%)

    43.1

    24.2

    56.6

    82.3 90.9

    10%

    6%

    11%

    13% 14%

    0%

    5%

    10%

    15%

    0

    20

    40

    60

    80

    100

    2014E 2015E 2016E 2017E 2018E

    Profit Margin (%)

    73.3 44.0

    93.3

    132.7 145.3

    17.0%

    10.5%

    17.5%

    21.5% 22.7%

    5%

    10%

    15%

    20%

    25%

    0

    50

    100

    150

    200

    2014E 2015E 2016E 2017E 2018E

    EBIT Margin (%) Sales is expected to rise y-o-y between

    FY14-18E from $432m to $640m owing to its strength in Man Us commercial segment

    Profitability margins are expected to improve from 17,0% to 22,7% in EBIT and expand to 14% in Net Income over the period due to eciency improvements

  • Key Financial Metrics - Gearing Man Us gearing will continue to

    reduce substantial ly over the forecast period from 1,97x to 0,65x in net debt / EBITDA

    Improving financial position will strengthen its debt capacity and enhance c red i t r i sk fo r any expansionary initiatives in the near term

    Net Debt / EBITDA

    Debt / Equity Net Debt / (Cash) - $M

    319.2 258.2 248.4

    209.3

    133.5

    2014E 2015E 2016E 2017E 2018E

    1.97x 2.22x

    1.60x

    1.09x

    0.65x

    2014E 2015E 2016E 2017E 2018E

    77% 73% 66%

    58% 51%

    2014E 2015E 2016E 2017E 2018E

  • Headline Operational Metrics Follower Base by Region

    Commercial Sales Development ($m) Revenue Breakdown by Division

    103 118

    153 185

    221

    269

    0

    50

    100

    150

    200

    250

    300

    2011 2012 2013 2014 2015E 2016E 31% 30% 25% 22% 21% 18% 18%

    37% 42% 43% 52% 51% 50% 49%

    32% 28% 32% 26% 28% 32% 33%

    0%

    20%

    40%

    60%

    80%

    100%

    2012 2013 2014 2015E 2016E 2017E 2018E

    Matchday Commercial Broadcas>ng

    650 m loyal fan base (50% Asia-Pacic)

    Company is growing total sales at 15.7% in FY17 and 3.7% in FY18

    Commercial division is the fastest growing segment - will generate over 50% of total sales in FY15

    49%

    11%

    14%

    26%

    Asia-Pacic Americas Europe MEA

  • Sponsorship Deal History Announced Date Term Comments Value

    BSkyB and British Telecom Announced in July 2012

    2 years from 2014 70% higher than previous deal of 1.77B

    3.0B

    GM Chevrolet Announced 7/30/12, for start of the 2014/15 season

    7 year term Shirt Future Sponsor 45m/year

    AON Announced 5/24/09, for start of the 2010/11 season

    4 year term Shirt Current Sponsor 20m/year

    Nike 13-year contract was signed in 2001

    Renew the contract

    Previous Kit Sponsor 25M/year

  • TRADE IDEA

  • Valuation Considerations To evaluate the fundamental value of Manchester Uniteds shares, I have built a 5-year discounted cash

    flow forecast for FY14-18E, incorporating my key assumptions about the future potential of the company

    Key assumptions used include:

    WACC: 9,6% Long-term growth rate: 3,5% Net Debt Position as at 30 June 2013: $389m No. outstanding shares: 39m

    On a DCF basis, the company is intrinsically valued at $21,6. Manchester United shares are currently trading on the New York Stock Exchange at a discount: $18,7 per share (upside of 16,1%) This implies FY15E EV/EBITDA multiple of 10,6x

    Applying dierent assumptions for terminal growth and WACC our valuation ranges from $19,1-24,5

    WACC (%)

    21,6 8,6% 9,1% 9,6% 10,1% 10,6%

    Terminal Growth

    (%)

    2,0% 20,6 18,4 16,4 14,7 13,2

    2,5% 22,7 20,1 17,9 16,0 14,3

    3,0% 25,1 22,1 19,6 17,5 15,6

    3,5% 28,0 24,5 21,6 19,1 17,0

    4,0% 31,5 27,3 23,9 21,1 18,6

    4,5% 35,9 30,8 26,7 23,3 20,5

    5,0% 41,5 35,1 30,1 26,1 22,8

  • Discounted Cash Flow Analysis Financial Year (Dec. Year end) 2013 2014 2015 2016 2017 2018 Terminal Period

    Total Turnover 363 431 419 533 617 640 growth (%) 18,7% -2,9% 27,4% 15,7% 3,7% EBIT 62 73 44 93 133 145 margin (%) 17,1% 17,0% 10,5% 17,5% 21,5% 22,7% Depreciation & Amortisation 119,0 88,5 72,6 61,8 58,9 59,9 Tax (21,7) (25,7) (15,4) (32,7) (46,5) (50,8) Capital Expenditure 13,0 43,1 41,9 53,3 61,7 64,0 Capex/Sales (%) -3,6% -10,0% -10,0% -10,0% -10,0% -10,0% Working Capital 0,0 (26,4) 0,5 (4,5) (3,3) (0,9) Working Capital / Sales (%) 0,0% 6,1% -0,1% 0,8% 0,5% 0,1% Free Cash Flow 146,3 66,7 59,8 64,7 80,1 89,4 89,4 Discount Factor 0,91 0,83 0,76 0,69 0,63 0,63 Terminal Value 1 517 Present Value 60,82 49,78 49,15 55,54 56,54 959 Enterprise Value (m) 1 231 Net Debt as at (Dec 2013) 389 Market Capitalisation (m) 842 No. Shares (m) 39 Share Price ($) 21,6

  • APPENDIX

  • Operating Assumptions Sales Actual Actual Actual Forecast Forecast Forecast Forecast Forecast 2011 2012 2013 2014 2015 2016 2017 2018 Matchday 98,8 109,2 108,3 91,6 109,6 113,2 115,0 Commercial 117,5 152,5 185,8 216,8 273,7 309,1 315,0 Broadcasting 104 101,5 137,0 110,3 150,1 195,0 210,0

    Total 320,3 363,2 431,1 418,7 533,4 617,3 640,0 13,4% 18,7% -2,9% 27,4% 15,7% 3,7%

    Divisional Revenue Split

    Matchday 31% 30% 25% 22% 21% 18% 18% Commercial 37% 42% 43% 52% 51% 50% 49% Broadcasting 32% 28% 32% 26% 28% 32% 33%

    Divisional Revenue Growth Matchday 10,5% -0,8% -15,4% 19,7% 3,3% 1,6%

    Commercial 29,8% 21,8% 16,7% 26,2% 12,9% 1,9%

    Broadcasting -2,4% 35,0% -19,5% 36,1% 29,9% 7,7%

  • Financial Assumptions Manchester United Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj. Financial Assumptions 30.06.2011 30.06.2012 30.06.2013 30.06.2014 30.06.2015 30.06.2016 30.06.2017 30.06.2018 Income statement

    Sales growth 13,4% 10,0% COGS as % of sales 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% Annual depr. as % of previous PPE 48,0% 35,0% 35,0% 35,0% 35,0% 35,0% SG&A as % of sales 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% Amortization of other intangibles amount 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Non-recurring items amount 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Effective tax rate 35,0% 35,0% 35,0% 35,0% 35,0%

    Shareholder info Diluted weighted average shares outstanding 155,4 163,8 163,8 163,8 163,8 163,8 163,8 Dividend per share growth rate (100,0%) 0,0% 0,0% 0,0% 0,0% 0,0%

    Balance sheet: current assets Accounts receivable as % of sales 23,2% 18,9% 18,9% 18,9% 18,9% 18,9% 18,9% Inventories % of COGS 0,0% 0,0% 0,0% 0,0% 0,0% Other current assets % of sales 0,3% 0,1% 0,0% 0,0% 0,0% 0,0% 0,0%

    Balance sheet: non-current assets Capital expenditures % of sales 0,0% 3,6% 10,0% 10,0% 10,0% 10,0% 10,0% Other assets % of sales 5,4% 44,3% 44,3% 44,3% 44,3% 44,3% 44,3%

    Balance sheet: liabilities Accounts payable and accruals % of COGS 21,6% 15,0% 15,0% 15,0% 15,0% 15,0%

    Other long-term liabilities % of sales 19,1% 15,5% 0,0% 0,0% 0,0% 0,0% 0,0% Balance sheet: equity

    end Common stock amount 249,7 318,1 318,1 318,1 318,1 318,1 318,1 Share repurchases $ amount (show as positive) 0,0 0,0 0,0 0,0 0,0

    Debt (/$ amount) Loans due for repayment 0,0 0,0 0,0 0,0 0,0 Other long-term debt repayment 0,0 0,0 0,0 0,0 0,0

    Interest Rate (%) Short term debt 3,00% 3,00% 3,00% 3,00% 3,00% Loans due for repayment 2,00% 2,00% 2,00% 2,00% 2,00% Other long-term debt repayment 0,00% 0,00% 0,00% 0,00% 0,00% Cash 1,00% 1,00% 1,00% 1,00% 1,00%

  • Income Statement Manchester United Hist. Hist. Hist Proj. Proj. Proj. Proj. Proj. Income Statement 30.06.2011 30.06.2012 30.06.2013 30.06.2014 30.06.2015 30.06.2016 30.06.2017 30.06.2018

    Net Sales 0,0 320,3 363,2 431,1 418,7 533,4 617,3 640,0 COGS 0,0 0,0 0,0 0,0 0,0 SG&A (357,8) (374,7) (440,1) (484,6) (494,7) EBIT 63,3 44,9 62,0 73,3 44,0 93,3 132,7 145,3

    Depreciation 87,0 105,0 119,0 88,5 72,6 61,8 58,9 59,9 Amortization 0,0 0,0 0,0 0,0 0,0 EBITDA 161,8 116,6 155,2 191,6 205,2

    Non-recurring items 0,0 0,0 0,0 0,0 0,0 Interest Income 0,8 0,9 1,2 1,5 2,1 Interest Expense 7,7 7,5 7,5 7,5 7,5 Profit before taxes 66,3 37,3 87,0 126,7 139,8

    Taxes 3,3 23,2 13,1 30,5 44,3 48,9 Profit after tax 0,0 0,0 43,1 24,2 56,6 82,3 90,9

    Net income 0,0 0,0 43,1 24,2 56,6 82,3 90,9

    Shareholder information Diluted weighted average shares outstanding 155,4 163,8 163,8 163,8 163,8 163,8 163,8 Diluted earnings per share $0,00 $0,00 $0,26 $0,15 $0,35 $0,50 $0,55 Dividends per share $0,06 $0,00 $0,00 $0,00 $0,00 $0,00 $0,00 Dividends 10,0 0,0 0,0 0,0 0,0 0,0 0,0

  • Balance Sheet Manchester United Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.

    Balance Sheet 30.06.2011 30.06.2012 30.06.2013 30.06.2014 30.06.2015 30.06.2016 30.06.2017 30.06.2018 Assets Current assets

    Cash and cash equivalents 70,6 94,4 58,3 119,3 129,1 168,2 244,0 Trade and other receivables 74,2 68,6 81,4 79,1 100,8 116,6 120,9 Current Tax receivables 2,5 0,0 0,0 0,0 0,0 0,0 0,0 Other current assets 1,0 0,3 0,0 0,0 0,0 0,0 0,0

    Total current assets 148,2 163,3 139,8 198,4 229,9 284,8 364,9

    Non-current assets Net PP&E 247,9 252,8 207,4 176,7 168,2 171,1 175,2 Goodwill 421,5 421,5 421,5 421,5 421,5 421,5 421,5 Other intangibles 112,4 119,9 119,9 119,9 119,9 119,9 119,9

    Other assets 17,2 160,8 190,9 185,4 236,1 273,3 283,3

    Total assets 947,1 1 118,3 1 079,4 1 101,8 1 175,6 1 270,5 1 364,8

    Liabilities Current liabilities

    Short term debt 15,6 11,8 0,0 0,0 0,0 0,0 0,0 Accounts payable and accruals 83,6 78,5 64,7 62,8 80,0 92,6 96,0 Accrued income taxes 128,5 146,3 146,3 146,3 146,3 146,3 146,3

    Total current liabilities 227,8 236,5 211,0 209,1 226,3 238,9 242,3

    Non-current liabilities Total long-term debt 421,2 377,5 377,5 377,5 377,5 377,5 377,5 Other long-term liabilities 61,1 56,4 0,0 0,0 0,0 0,0 0,0

    Total liabilities 710,1 670,4 588,4 586,6 603,8 616,4 619,8

    Equity Common stock 249,7 318,1 318,1 318,1 318,1 318,1 318,1 Retained earnings (12,7) 129,8 172,9 197,2 253,8 336,1 426,9 Treasury stock 0,0 0,0 0,0 0,0 0,0 0,0 0,0

    Total equity 237,0 448,0 491,0 515,3 571,9 654,2 745,0

    Total Liab.& Equity 947,2 1 118,3 1 079,5 1 101,9 1 175,6 1 270,6 1 364,8

    Balance? OK OK OK OK OK OK OK

  • Cash Flow Statement Manchester United Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.

    Cash Flow Statement 30.06.2011 30.06.2012 30.06.2013 30.06.2014 30.06.2015 30.06.2016 30.06.2017 30.06.2018

    Net Income 43,1 24,2 56,6 82,3 90,9 Depreciation 87,0 105,0 119,0 88,5 72,6 61,8 58,9 59,9 Amortisation 0,0 0,0 0,0 0,0 0,0 Change in OWC (26,4) 0,5 (4,5) (3,3) (0,9) Change in other assets (30,1) 5,5 (50,8) (37,1) (10,0) Change in other liabilities (56,4) 0,0 0,0 0,0 0,0 Cash from Operating Activities 18,8 102,8 63,2 100,8 139,8

    Capex 43,1 41,9 53,3 61,7 64,0 Cash from Investing Activities -43,1 -41,9 -53,3 -61,7 -64,0

    Change in Common Stock 0,0 0,0 0,0 0,0 0,0 Change in Treasury Stock 0,0 0,0 0,0 0,0 0,0 Dividends 0,0 0,0 0,0 0,0 0,0 Long Term Debt Repayment 0,0 0,0 0,0 0,0 0,0 Cash from Financing Activities (0,0) 0,0 0,0 0,0 0,0

    Net Cash Flow (24,4) 61,0 9,8 39,1 75,8

    Beginning Cash 82,7 58,3 119,3 129,1 168,2 Ending Cash 82,7 58,3 119,3 129,1 168,2 244,0

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