Fine margins

Borussia Dortmund 8 October 2019 Update
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Borussia Dortmund

Fine margins

Annual report

Travel & leisure

8 October 2019

Price

€9.34

Market cap

€859m

Net cash (€m) at June 2019 including finance leases

44.4

Shares in issue

92.0m

Free float

60.1%

Code

BVB

Primary exchange

FRA

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.4

6.6

18.8

Rel (local)

3.2

10.8

19.0

52-week high/low

€10.09

€7.02

Business description

The group operates Borussia Dortmund, a leading German football club, Bundesliga runners-up in 2018/19, DFB Cup winners in 2016/17 and competing in this season’s UEFA Champions League (Round of 16 participants in 2018/19).

Next events

Edison sports conference

8 October 2019

Champions League against Inter Milan

23 October 2019

Q1 results

14 November 2019

Analysts

Richard Finch

+44 (0)20 3077 5700

Neil Shah

+44 (0)20 3077 5715

Borussia Dortmund is a client of Edison Investment Research Limited

Borussia Dortmund (BVB) enters the international break with mixed results. A decent season start, notably Supercup triumph vs Bayern and top of its strong Champions League group, could have been so much better but for difficulty closing out games, epitomised by four recent draws despite winning positions. This may cost Dortmund in a more competitive Bundesliga than of late (leading eight teams separated by just four points). We are nonetheless raising our current-year EBITDA forecast from €110m to €128m both to reflect change of accounting policy (€10.7m boost in FY18) and sustained buoyancy (€21m post-transfer revenue upgrade). Progress is subject as ever to surprise from Dortmund’s ability to generate substantial hidden reserves from transfers (we make no allowance for possible Sancho sale).

Year end

Revenue* (€m)

EBITDA
(€m)

PBT**
(€m)

EPS**
(€)

DPS
(€)

EV/EBITDA
(x)

06/18

313.3

137.3

121.9

1.13

0.06

5.9

06/19

369.3

116.0

101.5

0.94

0.06

7.0

06/20e

394.0

128.0

113.0

1.05

0.06

6.5

06/21e

414.0

132.0

116.0

1.07

0.06

6.4

Note: *Before player transactions. **PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY19: Operational revenue growth to the fore

With the previous year flattered by two bumper transfers, we highlight the 18% rise in FY19 pre-transfer revenue, driven by TV marketing income from the Champions League and exactly as we forecast. By contrast, Q4 transfers were below our expectations (€8m vs €18m) but the impact on EBITDA is unclear, given a change in accounting policy primarily for agent and brokerage commissions for contract extensions. Assuming a similar boost in FY19 to FY18’s positive €10.7m accounting revision, our unadjusted total EBITDA forecast of €105m was effectively met.

Increasing profit resilience

The absence of significant changes in media contracts and competitions suggests profit consolidation this year and indeed next, assuming Champions League qualification. Yet, as detailed on page 2, momentum, both operationally and in a lively transfer market (summer 2019 spend up 20% by the five major leagues), encourages small FY20 upgrades, change of accounting policy apart. We reiterate that transfers are the joker in the pack; it is invidious to single out Sancho, but disposal at current valuation (at €100m, the Bundesliga’s most valuable player) might alone yield the bulk of our EBITDA forecast.

Valuation: Clear value creation

www.transfermarkt.de’s latest squad valuation (c €610m, adjusted for loans) shows BVB’s hidden reserves (over €300m surplus of market value to reported net player assets, adjusted for recent signings). While notional and at sporting cost, this underpins our forecasts in view of increased reliance on transfers. The share price is at a c 25% discount to a simple sum-of-the-parts valuation of €12.30 (from €10.75/share).

Revenue and profit analysis

Exhibit 1: Revenue and profit analysis

Year end June (€m)

Q1-Q318

Q418

FY18

Q1-Q319

Q419

FY19

2020e

2021e

Home matches

Bundesliga

14

3

17

14

3

17

17

17

Champions League

3

-

3

4

-

4

4.

4.

Europa League

2

-

2

-

-

-

-

-

Domestic cups

1

-

1

2

-

2

3

2

Away matches

Champions League

3

-

3

3

1

4

4

4

Europa League

2

-

2

-

-

-

-

-

Domestic cups

3

-

3

1

-

1

3

3

Revenue

Match operations

Bundesliga

22.3e

5.1e

27.4

22.9e

5.3e

28.2

28.8

29.4

Champions League

5.8

-

5.8

7.5

-

7.5

7.7

8.0

Europa League

3.3

-

3.3

-

-

-

-

-

Domestic cups

2.2

-

2.2

2.7

-

2.7

3.0

2.6

Other

2.9e

0.6e

3.5

6.2e

0.1e

6.3

6.5

6.5

Total

36.6

5.7

42.3

39.3

5.4

44.7

46.0

46.5

TV marketing

Bundesliga

65.0

23.0

88.0

72.5

25.6

98.1

106.0

114.5

Champions League

28.1

-

28.1

68.0

0.1

68.1

70.0

72.0

Europa League

2.9

0.7

3.6

-

-

-

-

-

Domestic cups

2.6

-

2.6

1.2

-

1.2

4.0

4.0

Total

98.6

23.7

122.3

141.6

25.7

167.3

180.0

190.5

Advertising

67.5

26.5

94.0

69.4

27.4

96.8

107.0

115.0

Merchandising

24.9

4.6

29.5

24.4

5.6

30.0

30.5

31.0

Catering/other

18.7

6.5

25.2

22.6

7.9

30.5

30.5

31.0

Revenue before transfers

246.5

66.8

313.3

297.3

72.0

369.3

394.0

414.0

Transfers

208.8*

13.9

222.7

111.9**

8.3

120.2

140.0***

150.0

Total

455.4

80.7

536.0

409.2

80.3

489.5

534.0

564.0

Other operating income

3.0

0.9

3.9

5.0

2.7

7.7

7.0

8.0

Labour costs

Squad

n/a

n/a

(151.7)

n/a

n/a

(167.0)

(180.0)

(194.5)

Retail / admin

n/a

n/a

(26.2)

n/a

n/a

(28.9)

(30.0)

(31.0)

Other

n/a

n/a

(8.8)

n/a

n/a

(9.2)

(10.0)

(10.5)

Total

(139.3)

(47.4)

(186.7)

(153.4)

(51.7)

(205.1)

(220.0)

(236.0)

Material costs

(16.5)

(3.6)

(20.1)

(17.1)

(4.2)

(21.3)

(22.0)

(22.5)

Other operating costs

n/a

n/a

(195.8)****

n/a

n/a

(154.9)

(171.0)

(181.5)

EBITDA

n/a

n/a

137.3

n/a

n/a

116.0

128.0

132.0

Source: Edison Investment Research. Note: *Including disposals of Dembélé and Aubameyang. ** Including disposal of Pulisic. *** Average of transfer revenue of three previous years **** Reduced by €10.7m for change in accounting policy. Assuming Champions League round of 16 and DFB Cup semi-final.

Q419

Aside from trading, which was much as expected (pre-transfer revenue up 8% in Dortmund’s quietest quarter) and minimal player disposals, Q419 was notable for a change in accounting policy for agent and brokerage commissions for contract extensions and players acquired on free transfers. Previously included in other operating costs, these are now recognised as intangible assets and thus subject to amortisation over the remaining term of the contracts. FY18 has been duly adjusted, ie €10.7m reduction in other operating costs (see Exhibit 1), hence revision of EBITDA from €126.6m to €137.3m and €7.8m increase in amortisation, resulting in FRS3 PBT up from €31.8m to €34.7m. Importantly, the impact for FY19 of the accounting change has not been disclosed.

Minor upgrades for FY20

Despite maintained operational factors, ie competition and broadcasting, we are raising our FY20 pre-transfer revenue forecast from €383m to €394m, primarily because of assumed renewal of PUMA’s kit sponsorship contract on significantly enhanced terms (it is due to expire in 2020). Transfer income is taken to be the average of the last three years, ie €140m against our previous forecast of €130m but is of course highly volatile.

Progress to the round of 16 in the Champions League continues to be assumed. A strong performance against Barcelona and a win at Slavia Prague have put Dortmund in a good position to qualify for the knockout stage but imminent back-to-back encounters with Inter Milan, currently second in Serie A, ensure little room for error in a challenging group.

A top-four finish in the Bundesliga is also still assumed even if recent results suggest otherwise. After heading the table in the first two weeks of the season, Dortmund now stands eighth. However, despite evidently greater competition from the major clubs across the board, the disparity to Champions League qualification (top-four) is merely two points, as shown in Exhibit 2, and it is still very early days (27 games remaining). Dortmund has achieved ‘top-four,’ its premier sporting metric, in eight of the last nine seasons, indeed in 2018/19 by a convincing 21 points. As with the Champions League, resumption after the international break brings especial tests with the Revierderby at Schalke and successive games against the top three teams.

Exhibit 2: Top half of Bundesliga this season after Matchday 7

Source: Bundesliga

More of the same in FY21

Assuming Champions League qualification, we envisage continued modest operational progress with scope for transfer surprises. In terms of TV marketing we note a newly announced six-year US agreement between the Bundesliga and ESPN, effective August 2020 and replacing FOX, whose contract expires at the end of this season. Next year should also see agreement on the next cycle of domestic Bundesliga media rights. Increasing interest from digital platforms is expected to drive up their value.

Valuation

The share price is at c 25% discount to a simple sum-of-the-parts valuation of €12.30/share (€10.75 in our June report), based on estimated market value of players c €610m, per www.transfermarkt.de, adjusted to exclude Hakimi (on loan), brand value €481m (at May 2018 per Brand Finance) and financial position (€44m net cash at end FY19).

This squad valuation necessarily does not allow for step changes in the value of emerging talent, which Dortmund is so adept at identifying and is attracting the attention of major clubs at ever younger ages. Potential prodigies such as Leonardo Balerdi may emulate the uplift (admittedly unrealised) of estimated €91m attributable to similarly youthful Sancho or the bumper realised returns on Dembélé and Pulisic. There may also be appreciation by established talent (see Exhibit 3), notably the pre-season signing of internationals Brandt and Hazard, which has already elicited clear upgrades on approval of their Dortmund prospects. Alcácer, previously on loan, has newly seen his valuation rise by a third to €50m (€21m cost this summer), approaching the most valuable Bundesliga strikers, Lewandowski and Werner (both €65m).

Exhibit 3: Current squad development (players with estimated market value of €25m+)

Date

Age at signing

Cost (€m)

Current value (est) (€m)

Contract expiry

Jadon Sancho

2017

17

9

100

2022

Marco Reus

2012

23

17

50

2023

Manuel Akanji

2018

22

21

40

2022

Axel Witsel

2018

29

20

32

2022

Dan-Axel Zagadou

2017

18

Free

28

2022

Thomas Delaney

2018

26

20

27

2022

Julian Weigl

2015

19

3

25

2021

Raphaël Guerreiro

2016

22

12

25

2020

New signings (from July 2019)

Julian Brandt

2019

23

25

50

2024

Paco Alcácer

2019*

25

21

50

2023

Thorgan Hazard

2019

26

26

38

2024

Mats Hummels

2019

30

30

35

2022

Nico Schulz

2019

26

26

25

2024

Source: www.transfermarkt.de. Note: *On loan from Barcelona for the 2018/19 season.

Beyond this is sustained transfer market buoyancy, shown by a near doubling in spend to over €5bn in 2018/19 by the five major European leagues over the last four years (Exhibit 4). Consolidation last season was understandable after such a heady rise (30% in 2017/18 alone), heralding a sharp resumption in growth (c 20%) in the recent summer ‘window’. This comes at a price in terms of player replacement, but Dortmund is a net seller.

Exhibit 4: Changes in player transfer market spend by five major European leagues

Exhibit 5: Financial summary

€'000s

2018

2019

2020e

2021e

June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

Revenue

 

 

536,000

489,500

534,000

564,000

EBITDA

 

 

137,300

116,000

128,000

132,000

Operating Profit (before amort. and except.)

 

 

126,200

103,200

114,000

117,000

Intangible Amortisation

(66,800)

(65,900)

(85,000)

(90,000)

Exceptionals

(20,400)

(13,800)

0

0

Other

0

0

0

0

Operating Profit

39,000

23,500

29,000

27,000

Net Interest

(4,300)

(1,700)

(1,000)

(1,000)

Other financial items

0

0

0

0

Profit Before Tax (norm)

 

 

121,900

101,500

113,000

116,000

Profit Before Tax (FRS 3)

 

 

34,700

21,800

28,000

26,000

Tax

(3,000)

(4,400)

(5,000)

(5,000)

Profit After Tax (norm)

103,600

86,300

96,100

98,600

Profit After Tax (FRS 3)

31,700

17,400

23,000

21,000

Minority interests

0

0

0

0

Net income (normalised)

103,600

86,300

96,100

98,600

Profit after tax (FRS3)

31,700

17,400

23,000

21,000

Average Number of Shares Outstanding (m)

92.0

92.0

92.0

92.0

EPS - normalised (c)

 

 

112.6

93.8

104.5

107.2

EPS - (IFRS) (c)

 

 

34.5

18.9

25.0

22.8

Dividend per share (c)

6.0

6.0

6.0

6.0

EBITDA Margin (%)

25.6

23.7

24.0

23.4

Operating Margin (before GW and except.) (%)

23.5

21.1

21.3

20.7

BALANCE SHEET

Fixed Assets

 

 

351,400

371,700

414,000

445,000

Intangible Assets

120,300

163,700

200,000

230,000

Tangible Assets

180,700

184,000

181,000

180,000

Investments

50,400

24,000

33,000

35,000

Current Assets

 

 

134,200

128,400

114,000

101,000

Stocks

5,600

4,600

5,000

5,000

Debtors

23,000

30,100

32,000

34,000

Cash

59,500

55,900

44,000

29,000

Other

46,100

37,800

33,000

33,000

Current Liabilities

 

 

(119,000)

(128,100)

(132,000)

(134,000)

Creditors

(117,000)

(125,000)

(129,000)

(131,000)

Short term borrowings

0

0

0

0

Finance leases

(2,000)

(3,100)

(3,000)

(3,000)

Long Term Liabilities

 

 

(23,000)

(17,100)

(17,000)

(18,000)

Long term borrowings

0

0

0

0

Finance leases

(6,700)

(8,400)

(8,000)

(6,000)

Other long term liabilities

(16,300)

(8,700)

(9,000)

(12,000)

Net Assets

 

 

343,600

354,900

379,000

394,000

CASH FLOW

Operating Cash Flow

 

 

168,100

150,700

150,000

154,000

Net Interest

(3,700)

(1,500)

(1,000)

(1,000)

Tax

(1,700)

(2,800)

(4,000)

(4,000)

Capex

(7,200)

(9,900)

(10,900)

(11,500)

Acquisitions/disposals

(135,600)

(129,500)

(140,000)

(145,000)

Financing

6,100

(7,900)

0

0

Dividends

(5,500)

(5,500)

(5,500)

(5,500)

Net Cash Flow

20,500

(6,400)

(11,400)

(13,000)

Opening net debt/(cash)

 

 

(30,300)

(50,800)

(44,400)

(33,000)

Finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(50,800)

(44,400)

(33,000)

(20,000)

Source: Company data, Edison Investment Research


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This report has been commissioned by Borussia Dortmund and prepared and issued by Edison, in consideration of a fee payable by Borussia Dortmund. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Borussia Dortmund and prepared and issued by Edison, in consideration of a fee payable by Borussia Dortmund. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (‘FTSE’) © FTSE 2019. ‘FTSE®’ is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are ‘wholesale clients’ for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a ‘personalised service’ and, to the extent that it contains any financial advice, is intended only as a ‘class service’ provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the ‘publishers' exclusion’ from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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