10th February 2022


10th February 2022

These are difficult times for the business. Production quality is well below that achieved in the late 1990s and 2000s. Indeed, the general trend over the last few years has been markedly downwards with occasional lifts which inevitably and predictably reverse back into the broader direction of travel.

Production Directors have come and gone in recent years with the present incumbent viewed merely as a supposedly temporary measure ahead of an intended high-profile appointment later in the year. There is increasing pressure to alter production methods and energise personnel to reach what is to many the obvious potential on the factory floor, yet the overall business strategy has itself faltered in recent years with an increasing lack of economic profits. Indeed, the effects of higher labour costs and fees associated with procuring new workers and equipment has seen losses increase since the last economic profit which was achieved back in 2013.

Covid has, of course, pushed the business into further economic losses with an increase in net debt and the extensive use of credit facilities in order to maintain operations. Restrictions imposed by Government badly affected customer interactions and sales, leaving the business exposed to lower revenue levels and a punitively fixed cost base given the nature of employee contracts. A forced shutdown did not help financially although production levels actually increased to lift the company into second place in in 2021 in terms of output quality among its domestic peer group.

The business remains highly active in procuring new equipment and personnel with recent purchases from Europe of over £140m in the last year. However, deployment has been somewhat haphazard with some of the new additions yet to be fully integrated into the production process. Indeed, some of this new and expensive equipment has been short-leased to smaller competitors. This has inevitably raised questions about procurement and deployment strategies given that plant and equipment to the value of £110m+ had been largely lying idle since purchase.

The share price has made little progress since the company undertook an IPO in 2012. The shares have decreased in value at the time of writing from the IPO strike price of $14.00 to $13.42. Over the same period, the S&P 500 index has increased by 253%.

Blue-coloured competitors have eaten into market share with increasingly better product development and quality. Investment in new plant has been more considered and effective. This has exerted considerable pressure on the business to return to previous levels of success given the competitive nature of the market.

In our view, the company appears to have a somewhat vague set of objective in being satisfied with continuing participation in European markets but apparently lacking the aim of being the most dominant or successful entity. The ability to compete abroad is somewhat restricted if performance in the domestic market is in itself inferior and the negative impact on the balance sheet without the international aspect can be, and has been, damaging. Yet the company continues to enjoy the support of a global customer/fan base with a highly responsive social media presence.

The current Executive Vice-Chairman who has presided over this period of apparent decline was replaced by a new Chief Executive on 1st February.

The company is, of course, Manchester United.

Bloomberg quotes Manchester United’s market capitalisation at around $2.2bn. However, the media continues to speculate over the exit price/value for the Glazer family in order to give up their prized soccer club with quotes as high as $4bn.

Unfortunately, and as described above, Manchester United has struggled to regain the status of England’s no. 1 club since Sir Alex Ferguson retired in 2013, both on and off the pitch. We have written about United’s financial travails previously and we remain sceptical that some form of financial recovery is imminent given that since Sir Alex’s departure, the club has enjoyed the managerial services of the Chosen One, the Dutch One, the Special One, the Likeable but Dispensable One and currently the Temporary One.

The club’s economic performance since 2009 has been defined by increasing costs, primarily in player wages, and increasing economic losses.

With a distinct lack of economic profits, the new Chief Executive has a considerable task list to work through. Indeed, recent events off the pitch concerning the running down of contracts give rise to the thought that forward planning capabilities and objectives need to be re-examined. The prospect of allowing Paul Pogba to go for nothing not just once but perhaps twice represents incredibly poor judgement. And the general malaise is beginning to have a wider effect.

The share price has been trading under the 2012 IPO price of $14.00 since 19th January 2022. Thus, investors with the appropriate class of share are now failing to see a return other than a 9 cents per share dividend (usually) payable every six months.

However, on the day the Ole Gunnar Solskjaer was sacked, the share price was $15.79. Manchester United shares have dropped by 15% since then. Is it the case that the capital markets are starting to wise-up to Manchester United’s economic performance?

Certainly, the much-lauded commercial side of the business has been lacking in growth in recent years. Indeed, performance has been flat since 2015-16. Since then, the ‘noisy neighbours’ otherwise known as Manchester City have grown commercial revenues from £177.87m to £271.67m thus overtaking Manchester United as the most successful club in generating commercial revenue in the Premier League on an annual basis.

And since the acquisition of Manchester City by Abu Dhabi interests in 2008, the club has accumulated 58 more points than their red rivals. The balance of power would appear to have well and truly moved.

And if the latest UEFA club financial report is anything to go by, the European theatre of competition is facing increased, and in many cases, record operating losses (no cost of equity capital included so the real picture is going to be worse) along with rising labour costs. Of course, the report trumpets an increase in broadcast revenues but it is still hugely disappointing that this particular administration still hasn’t worked out the longer-term trend that regardless of the size of broadcast income coupled with a lack of effective operating regulations, clubs will still lose increasing amounts of money.

One of the methods that we employ in valuing a business is to work backwards from the proposed valuation number. In Manchester United’s case, we can go further and determine what the business needs to achieve in order to justify a particular share price.

Initially, we set out the recent economic performance over the last 10 years and also the assumed or forecast EP performance over the next 10 years to bring us back to the share price of $15.79 on the day of Solskjaer’s departure, using mathematical models.

Therefore, we have prepared a fundamental valuation. What combination of future economic profits can sustain a share price of $15.79?

As can be seen in the above graphic, the club/business has to radically alter its financial performance in the coming decade with the achievement of regular economic profits as opposed to regular economic losses.

Unfortunately, Manchester United is a publicly listed entity and as such is required to issue quarterly updates on its financial performance given its placing on the New York Stock Exchange. We are, therefore, able to get an almost real-time view of not only the business but also the potentially wider trends within the other Premier League clubs.

The club’s Q1 2022 results demonstrate the influence of bringing in those expensive and arguably under-utilised assets with a staff costs bill rising 23.1% year-on-year leading to a quarterly economic loss of £21.67m. Not the best start to a season whereby crowds returned and revenues reached a reasonably ‘normal’ £126.46m.

What is clear is that the current uncertainty enveloping the club on so many fronts will largely be resolved in time. What remains unclear is whether or not the business can recover share pricing levels well above the IPO price before the capital markets get wiser still.

This blog was composed on 4th February 2022. The share price on the date of publication (10th February 2022) was $14.05.


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