Fresh start

Borussia Dortmund 15 July 2016 Update

Borussia Dortmund

Fresh start

Revised forecasts

Travel & leisure

15 July 2016

Price

€3.95

Market cap

€363m

Net cash (€m) at March 2016 including finance leases

13.3

Shares in issue

92.0m

Free float

60.5%

Code

BVB

Primary exchange

Frankfurt

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.0)

(3.2)

8.9

Rel (local)

(8.2)

(2.9)

24.5

52-week high/low

€4.50

€3.58

Business description

The group operates Borussia Dortmund, a leading German football club, last season runners-up in the Bundesliga and quarter-finalists in the UEFA Europa League (Round of 16 participants in 2014/15 UEFA Champions League).

Next events

International Champions Cup China against Manchester United and Manchester City

22 + 28 July 2016

German Supercup against Bayern München

14 August 2016

Preliminary results

19 August 2016

Analysts

Richard Finch

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Borussia Dortmund is a client of Edison Investment Research Limited

While the simultaneous loss of key players Hummels, Mkhitaryan and Gündogan necessarily invites caution, coach Tuchel’s record of player development and the availability of significant funds for reinvestment make for exciting opportunity. Understandably, given squad rebuilding, financial implications are uncertain. However, assuming maintained positive sporting prospects and further c €40m player spend, we still look for a doubling in pre-transfer EBITDA (our key metric) in FY17, albeit from a reduced base in the face of inflationary wage pressure (we are lowering EBITDA forecasts by €6m for FY16 and by €13m for the year just started).

Year end

Revenue* (€m)

EBITDA*
(€m)

PBT**
(€m)

EPS**
(€)

DPS
(€)

EV/EBITDA
(x)

06/14

256.3

44.7

37.1

0.51

0.10

9.1

06/15

263.6

48.0***

44.2***

0.43***

0.05

6.9

06/16e

281.0

18.0

82.5

0.76

0.05

19.4****

06/17e

307.0

35.0

58.0

0.53

0.05

9.5

Note: *Before player transfer income. **PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. ***Including insurance claim benefit (our estimate €12m). ****15.8x including estimated €65m player sales proceeds

Reduction in EBITDA forecasts reflects investment

The changes to our EBITDA forecasts, detailed on page 2, relate substantially to labour costs, which may now be expected to continue to rise sharply, assuming on-field success. We had previously envisaged a moderation to +2% in the current period on the premise that the squad is already run on Champions League lines. Our new forecast of labour expenses up 11%, ie by €15m, is based on likely expenditure on new players of over €100m, ie reported transactions estimated at c €60m by www.transfermarkt.de plus, importantly, further as yet unspecified c €40m spend, thereby effectively representing reinvestment of the proceeds from the aforementioned high-profile disposals. In this context, H216 labour costs may also be assumed to have endured double-digit growth (we had expected +8%). Our FY16 EBITDA downgrade also reflects unexpectedly high material costs driven by the very success of the newly enhanced catering and events activities.

Successful value creation

Cost inflation apart, there is considerable encouragement from the company’s active revenue generation (we are raising forecasts by €11m and €7m for FY16 and FY17) and realisation of very significant surpluses to book value on player disposals, while ensuring a balance between financial and sporting interests. With regard to the Mkhitaryan transaction, management was evidently a reluctant seller but accepted that the offer by Manchester United was simply too good to refuse. The forecast increases in PBT and EPS reflect net transfer gains (see page 2).

Valuation: Fair

At an EV/EBITDA of 9.5x, FY17e recognises the long-term potential of powerful brand development, valuable media rights and strong cash flow, backed by season ticket sales and hidden reserves from player investment. We await details of the recent lucrative deal on Bundesliga media rights for four seasons from 2017/18.

Exhibit 1: Revenue and profit analysis

Year end June (€m)

H115

Q315

Q415

FY15

H116

Q316

Q416e

FY16e

FY17e

Home matches

Bundesliga

8

4

5

17

8

5

4

17

17

Champions League

3

1

-

4

-

-

-

-

4****

Europa League

-

-

-

-

2qual + 3

2

1

2qual + 6

-

DFB Cup

-

-

1

1

1

-

-

1

2*****

Away matches:

Champions League

3

1

4

-

-

-

-

4****

Europa League

-

-

-

-

2qual + 3

2

1

2qual + 6

-

DFB Cup

2

1

1+Final

4+Final

2

1

1+Final

4+Final

2*****

Revenue

Match operations:

Bundesliga

13.1e

6.3e

7.4e

26.8

13.6e

8.0e

6.4

28.0

29.0

Champions League

5.2e

2.2e

-

7.4

-

-

-

-

9.0

Europa League

-

-

-

-

7.5e

4.0e

1.5

13.0

-

DFB Cup

0.6e

0.3e

3.5e

4.4

1.3e

0.5e

1.7

3.5

3.5

Other

0.9e

0.1e

0.3e

1.3

1.1e

0.2e

0.2

1.5

1.5

Total

19.8

8.9

11.2

39.9

23.5

12.7

12.7

46.0

43.0

Broadcasting:

Bundesliga

21.6

9.0

12.9

43.6

30.0

14.9

16.1

61.0

64.0

Champions League

27.7

4.8

-

32.5

3.2

-

-

3.2

38.0

Europa League

-

-

-

-

8.3

2.3

2.2

12.8

-

DFB Cup

1.8

0.3

3.9

6.0

0.7

0.7

4.6

6.0

3.0

Total

51.2

14.1

16.8

82.1

42.2

17.9

22.9

83.0

105.0

Advertising

37.5

18.1

20.1

75.7

40.0

20.0

22.0

82.0

85.0

Merchandising

23.9

6.9

8.5

39.3

24.4

7.4

9.2

41.0

44.0

Catering/other

12.4

5.5

8.7

26.6

13.3

6.2

9.5

29.0

30.0

Total

144.7

53.6

65.3

263.6

143.5

64.2

73.3

281.0

307.0

Other operating income

2.8

0.8

13.4*

17.0*

1.9

0.5

1.6

4.0

5.0

Labour costs

(56.6)

(28.7)

(32.6)

(117.9)

(66.1)

(35.0)

(35.9)

(137.0)

(152.0)

Share of revenue

39%

53%

50%

45%

46%

54%

49%

49%

51%

Material costs

(12.0)

(4.1)

(4.6)

(20.7)

(14.5)

(5.2)

(10.3)

(30.0)

(33.0)

Other operating costs

(49.8)

(19.1)

(25.1)

(94.0)

(53.0)

(22.0)

(25.0)

(100.0)

(92.0)

EBITDA before transfers

29.1

2.5

16.4

48.0

11.8

2.5

3.7

18.0

35.0

Margin

20%

5%

25%

18%

8%

4%

5%

6%

11%

Profit on disposal of players

1.6

0.2

5.8

7.6

13.7

(0.3)

62.6**

76.0**

35.0***

Transfer income

5.6

0.2

6.6

12.4

24.7

8.2

65.1

98.0

42.0

Less: Carrying value

(4.0)

-

(0.8)

(4.8)

(11.0)

(8.5)

(2.5)

(22.0)

(7.0)

Source: Edison Investment Research. Note: *Including €12m insurance claim benefit (our estimate). **Predominantly gains on disposals of Hummels (estimated proceeds €38m and carrying value €1.5m) and Gündogan (estimated proceeds €27m and carrying value €1m). ***Gain on disposal of Mkhitaryan. ****Assuming exit in Round of 32. *****Assuming exit in quarter-final.

Exhibit 2: Financial summary

€'000s

2014

2015

2016e

2017e

June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

256,300

263,600

281,000

307,000

EBITDA

 

 

44,700

48,000*

18,000

35,000

Player transfers

 

 

4,400

7,600

76,000

35,000

Operating Profit (before amort. and except.)

40,900

46,100

84,000

59,000

Intangible Amortisation

(22,500)

(32,900)

(33,000)

(50,000)

Exceptionals

0

0

(7,500)***

0

Other

0

0

0

0

Operating Profit

18,400

13,200

43,500

9,000

Net Interest

(3,800)

(1,900)

(1,500)

(1,000)

Other financial items

0

(5,300)**

0

0

Profit Before Tax (norm)

 

 

37,100

44,200

82,500

58,000

Profit Before Tax (FRS 3)

 

 

14,600

6,000

42,000

8,000

Tax

(2,600)

(500)

(5,000)

(1,000)

Profit After Tax (norm)

34,500

43,700

77,500

57,000

Profit After Tax (FRS 3)

12,000

5,500

37,000

7,000

Average Number of Shares Outstanding (m)

61.4

87.3

92.0

92.0

EPS - normalised (c)

 

 

50.8

42.7

75.9

53.3

EPS - (IFRS) (c)

 

 

19.1

6.0

39.9

7.3

Dividend per share (c)

10.0

5.0

5.0

5.0

EBITDA Margin (%)

17.4

18.2

6.4

11.4

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

16.0

17.5

29.9

19.2

BALANCE SHEET

Fixed Assets

 

 

249,500

289,500

259,000

314,000

Intangible Assets

61,600

96,300

63,000

115,000

Tangible Assets

184,500

189,500

192,000

195,000

Investments

3,400

3,700

4,000

4,000

Current Assets

 

 

42,800

97,000

157,100

104,100

Stocks

5,900

9,400

11,000

12,000

Debtors

14,900

29,700

100,000

34,000

Cash

17,800

53,700

38,100

54,100

Other

4,200

4,200

8,000

4,000

Current Liabilities

 

 

(71,000)

(61,600)

(59,500)

(57,800)

Creditors

(60,500)

(59,100)

(57,000)

(55,300)

Short term borrowings

(8,900)

0

0

0

Finance leases

(1,600)

(2,500)

(2,500)

(2,500)

Long Term Liabilities

 

 

(76,000)

(38,800)

(38,600)

(39,600)

Long term borrowings

(32,100)

0

0

0

Finance leases

(20,100)

(21,600)

(21,600)

(21,600)

Other long term liabilities

(23,800)

(17,200)

(17,000)

(18,000)

Net Assets

 

 

145,300

286,100

318,000

320,700

CASH FLOW

Operating Cash Flow

 

 

33,900

24,400

13,000

30,000

Net Interest

(3,600)

(7,200)

(500)

(400)

Tax

(3,800)

(200)

(4,500)

(2,000)

Capex

(10,900)

(10,400)

(10,000)

(11,000)

Acquisitions/disposals

2,100

(61,700)

(9,000)****

4,000*****

Financing

(2,600)

135,700

0

0

Dividends

(6,100)

(6,100)

(4,600)

(4,600)

Net Cash Flow

9,000

74,500

(15,600)

16,000

Opening net debt/(cash)

 

 

53,900

44,900

(29,600)

(14,000)

Finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

44,900

(29,600)

(14,000)

(30,000)

Source: Company accounts, Edison Investment Research. Note: *Including estimated c €12m insurance claim benefit. **Early repayment of financial liabilities. ***Player asset write-down. ****Including acquisitions of Castro, Bürki and Weigl and disposals of Kampl, Immobile and Hofmann. *****including acquisitions of Dembélé, Rode, Guerreiro, Mor and Bartra and our assumption of further €40m reinvestment and disposals of Mkhitaryan, Hummels and Gündogan NB valuations estimated by www.transfermarkt.de.

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London, WC1V 7EE

United Kingdom

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245 Park Avenue, 39th Floor

10167, New York

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