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Columnists

Valuing Manchester United

The price of Manchester United (Man United) stock was $16.24 on Thursday, August 15, 2019.

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Valuing Manchester United, Manchester United: A football club or a business

The price of Manchester United (Man United) stock was $16.24 on Thursday, August 15, 2019.

What does this mean?

How is the price determined? Well, $16.24 is the price that sellers offered their shares on the trading exchange to buyers who bought those shares. In effect, the $16.24 price is market-determined and based on the interplay of demand and supply. If more investors want to buy Manchester United shares, the price rises, if more shareholders sell Man United shares, the price falls. Simple.

However, what triggers buyers and sellers to buy and sell respectively? It’s simple really. These investors have determined an intrinsic value for Manchester United shares and are trading off that value. For instance, if investors calculate that the intrinsic market value per share of Manchester United is $15, but the market price per share for Manchester United is $10.80, they will buy because they are buying at a discount to intrinsic value. If, however, they determined that the intrinsic price of Manchester United is $5, but market price is $10.80 then they will either sell or hold because the market price is at a premium to the intrinsic price per share.

The intrinsic value is the “perceived or calculated value of an asset, an investment, or a company.” Put in another way, the intrinsic value is the singular distillation of the entire value of a company, brand, profits, revenue streams reputation, everything.

I will categorize intrinsic value as the per share value of the Enterprises Value (EV) of the company plus intangibles like goodwill. (Enterprise Value = Market Capitalization + Market Value of Debt – Cash).

[READ MORE: Analysis: Why the stock market is rallying in November]

How do we measure the Enterprise Value of a football team?

The accounting firm KPMG “presents a team’s enterprise value, taken from its profitability, popularity, sporting potential, as well as the value of broadcasting rights and revenue opportunity stemming from stadium ownership.” Forbes, on the other hand, calculates a team’s value based on its “economic performance from matchday, broadcasting, and commercial sources, as well as any additional value generated by its market position or potential.” Both methodologies seek to pin a valuation based on assets and current and future revenue streams.

As at November 2019, Man United’s EV was projected at about $2.6 billion. This means the value of Old Trafford, with her 76,000 seats, players like Paul Pogba, the media and sponsorship deals, plus debt, less cash is a $2.6bn. If we add the intangibles like goodwill from a loyal fan base of 659 million, (including 325 million in Asia) we can then estimate the intrinsic value per share. Remember, this is a calculated guess based on revenues and goodwill; the answer will fluctuate from analyst to analyst.

Walking back, we can deduce that stocks move based on demand and supply, and demand is based on the perceived pricing relationship between intrinsic value per share and the market price. Hence, investors must understand how intrinsic value is calculated. The most common way to calculate Intrinsic value is the Discounted Cash Flow method (DCF), this method takes all the expected future cash flow the company will generate and “discounts” them back to the present day using a discount interest rate. Essentially, the DCF is utilizing the principle of the time value of money to determine an intrinsic value per share to be compared with the market price.

The question is thus simple, will intrinsic value per share rise or fall? By how much? What assumptions are underpinning the performance of the company?

How does Manchester United make money?

Man U makes money by winning, More wins and trophies bring in more fans, more fans bring in more revenues from gate takings, branding and media. This pushes up cash earned and increases the EV. On the flip side, if Man United stops winning, then the revenues go down, dropping EV. Losing out on the Champions League, for instance, is a potential £80m loss in UEFA payments, sponsorship deals and ticket sales.

Consider this, Man United shares were trading at $21.20 in February 2019. In that February, Manchester had been on a run of 12 games unbeaten. They had qualified for the Champions League  Quarter Finals and were contesting for top 4 in the English Premier League. This translated to more expected future income, thus the analyst calculated that revenues would go up, meaning EV would go up, thus making the shares of Man U “cheap” in February in relation to the current market price; thus, they bought more shares and rewarded Man United with a Market capitalization of $3.5 billion (Capitalization is price of shares multiplied by current market price).

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However, as at 14th November 2019, Man U was out of the Champions League and no longer contesting for the top four league table position in England. This clearly is a loss in revenues to the business, meaning EV will fall; thus, the analysts sold their positions on Man United because without the expected revenues as projected, the shares were overpriced, thus the shares fell to $16.24, reducing market capitalization of Man United to $2.68 billion, a $1 billion wipe-off in market capitalization.

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Valuing Manchester United

When Man U lose games, they lose money, it’s that simple. The future price of Man U shares is basically a function of how many games they can win. Lost revenues cause a fall in the share price and market capitalization.

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[READ ALSO: Don’t get stuck buying these stocks]

The real analytical skill is to determine how a business makes money, then use that knowledge to scenario plan assumption on revenues and costs, market shares and even regulatory issues, which will affect future revenues going forward, which impact the EV to derive an intrinsic price.

Whilst we have used football as an example, this analytical process is applicable in all industries.

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  • How does a company make money?
  • Draw up assumptions.
  • Calculate Intrinsic value.
  • Compare intrinsic value with market price.
  • If Intrinsic value is lower than market price, don’t buy.
  • If intrinsic value is higher than market price, buy.

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Columnists

AfCFTA: The underlying principles, objectives and benefits

The fears around the issue of dumping and border security should not outweigh the huge benefits that AfCFTA offers to the member-states.

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The Agreement (the “Agreement”) establishing the African Continental Free Trade Area (the “AfCFTA”) has continued to generate discussions following the commencement of trading under the new economic bloc. The Agreement was signed on 21 March 2018 at the Extra-Ordinary Summit of the African Union held in Kigali Rwanda and came into force on 30 May 2019 after the Gambia became the 22nd State to ratify it.

Nigeria signed the Agreement on 7th July 2019 and after initial dilly-dallying, ratified it in November 2020 leading to the formal deposit of the Instrument of ratification before the 05 December 2020 submission deadline. Paradoxically, Nigeria (34th member State to ratify the treaty) who was at the forefront of developing and negotiating the AfCFTA Agreement later became jittery at the point of ratification. The initial hesitation has been explained on the basis that prior consultation with the manufacturing community and other stakeholders was needed before ratification.

COVID-19 pandemic delayed the phase 2 negotiations and commencement of trading under AfCFTA which was earlier scheduled to start on 1st of July 2020. Trading eventually kicked off on 1st January 2021 and it is too early to assess the impact of trading yet particularly as some countries are yet to ratify the treaty. The AfCFTA has been lauded as a game-changer and ambitious project capable of lifting over 30 million people out of poverty on the continent, through trade liberalization and economic integration in line with the Pan African Vision (Agenda 2063) of an integrated, prosperous and peaceful Africa.

In terms of structure, the main Agreement is divided into 7 Parts and 30 Articles. In addition, there are Protocols, Annexes and Appendices which equally form part of the AfCFTA Agreement. Three of these Protocols are (i) the Protocol on Trade in Goods (ii) the Protocol on Trade in Services, and (iii) the Protocol on Rules and Procedures on the Settlement of Disputes. Article 8 of the Agreement is to the effect that the Protocols, Annexes and Appendices shall, upon adoption, form integral of the Agreement.

Read Also: AfCFTA: NESG advises FG to strengthen domestic value chains

The Phase Two Negotiations for both Trade in Goods and Trade in Services include (i) the Protocol on Investment (ii) the Protocol on Intellectual Property and (iii) the Protocol on Competition Policy as well as the associated Annexes and Appendices. As common with most treaties, the AfCFTA Agreement is expected to be organic as future amendments and updates are possible, provided that any additional instruments deemed necessary are to be concluded in furtherance of the objectives of AfCFTA and shall upon adoption, form an integral part of the Agreement.

Modelled after the principles of the World Trade Organization/General Agreement on Tariffs and Trade and General Agreement on Trade in Services (WTO/GATT/GATS), the AfCFTA has some of the trappings of custom union and common market even though one of the AfCFTA objectives is the creation of Continental Customs Union at a later stage. Conceptually, economic integration is broadly classified into five stages, viz: free trade area, Custom union, Common market, Economic union (single market) and Political union.

One key feature of Custom Union being the acceptance of a unified external common tariff against non-members. The European Union presents a unique example of the Customs Union through the instrumentality of the Union Customs Code which applies a uniform tariff system for imports from outside the EU. Unlike the Custom Union, the AfCFTA under its rules on Most-Favoured-Nation Treatment allows member States to conclude or maintain preferential trade arrangements including different tariff arrangements with Third Parties provided that such trade arrangements do not impede or frustrate the objectives of the Protocol on Trade in Goods. By default, WTO member countries trade based on conditions laid down under GATT.  It is in a bid to address the tariff and non-tariff barriers existing under the WTO, that some regions have opted for more favourable trade deals as seen in Europe, Asia, North America and now Africa.

As with any WTO-based trade treaty, there are key non-exhaustive underlying principles that underpin the AfCFTA. Some of these principles will form the subject of our discussions in subsequent publications. These include (i) the Most-Favoured-Nation Treatment and (ii) the Rules of Origin. Whilst the former mandates the State Parties to accord preferential treatment to one another, the latter spells out criteria for goods that will be eligible for preferential treatment under the AfCFTA. Equally important is the Anti-dumping and Countervailing Measure which provides trade remedies and remedial actions against imports which are detrimental to local industries. In relation to the Trade in Services, the Most-Favoured Nation exemptions afford State Parties a margin of leeway to exclude certain sectors or sub-sectors from their Schedule of Commitments and limit market access to those sectors or sub-sectors.

Read Also: FG outlines steps to be taken by businesses to export to AfCFTA countries

Key Objectives

The overarching objective behind the AfCFTA is the elimination or reduction of tariff and non-tariff barriers amongst the 54 Countries that agreed to be members of the bloc by providing a single market for goods and services, facilitated by movement of persons in order to deepen the economic integration and prosperity of the African continent. This key objective is to be achieved through successive rounds of negotiations that are to be done in phases.

In specific terms, the Agreement also seeks to (i) lay the foundation for the establishment of a Continental Customs Union; (ii) promote and attain sustainable and inclusive socio-economic development, gender equality and structural transformation of the State Parties, (iii) enhance the competitiveness of the economies of State Parties within the continent and global market, (iv) promote industrial development through diversification and regional value chain development, agricultural development and food security, and resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes. In order to actualize these noble objectives, Article 4 of the Agreement mandates State Parties to:

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  • Progressively eliminate tariffs and non-tariff barriers to trade in goods;
  • Progressively liberalise trade in services;
  • Cooperate on investment, intellectual property rights and competition policy;
  • Cooperate on all trade-related areas;
  • Cooperate on customs matters and the implementation of trade facilitation measures;
  • Establish a mechanism for the settlement of disputes concerning their rights and obligations; and
  • Establish and maintain an institutional framework for the implementation and administration of the AfCFTA.

There is no doubt that the actualization of these objectives will put Africa on the part of economic posterity and industrialization. It is expected that each State Party should demonstrate commitment, sincerity, and integrity in dealing with other member States. The success of the European Union and other similar regional trade blocs has shown that with the right political will and commitment from member-states, regional trade deals as seen in AfCFTA often contribute to the economic development of the participating region.

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Benefits

The AfCFTA is the world’s largest free trade zone since the establishment of the WTO in 1994 and offers a lot of benefits to member States particularly those with competitive advantage and enabling infrastructures. Africa has a population of 1.3 Billion people and a combined GDP of over $2.6 Trillion (more than 6 times of Nigeria’s GDP). According to the Brookings Institution’s report, intra-African trade accounts for 17 percent of Africa’s exports compared to 59 percent in Asia and 69 percent in Europe.

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The report projected that the removal of tariffs if well implemented could boost intra-regional trade up to 50 percent by 2040, from the current 17 percent. Nigeria has a competitive advantage in a number of sectors and stands in a position to benefit from the newly enlarged market. This will further increase investment in the distribution and logistics supply chain as cross-border trades will spiral up. Nigeria’s increasing unemployment rate of over 30% which has been made worse by the pandemic is expected to reduce when trading starts in commercial quantity.

Read Also: Digital transformations and AfCFTA as critical imperatives for the rebound of African economies

The AfCFTA will progressively reduce trade tariffs by over 90% by 2022 and by extension address the increasing inflation and infrastructural deficits within the continent. Nigeria, being the largest economy in the continent with strong service sector should position itself to benefit from the economies of scale that will follow the localization of industries. Oil refineries, cement, agriculture, food processing, minerals, banking and financial services, aviation, information technology and legal services have been identified as some of the critical sectors where Nigeria has competitive advantage.

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The fears around the issue of dumping and border security should not outweigh the huge benefits that AfCFTA offers to the member States. Rather, this should be a wake-up call for Nigeria to invest heavily in rail and road transport, port infrastructure, border security, internal security, electricity, education, and other enabling infrastructures. The last border closure was largely attributed to the issue of dumping and security as it was alleged that Nigeria was amongst other things being swamped with fake and sub-standard goods mostly from Asian countries through the Benin Republic.

The AfCFTA Rules of Origin provision is meant to address this, and it is hoped that the AfCFTA member States should demonstrate the political will to ensure strict compliance. While the regime of Trade in Goods appears to be taking shape, particularly with the commencement of trading early this year, the progressive framework for the negotiations of specific commitments by the member-states in the area of Trade in Services, should afford Nigeria the platform to ensure that the service sectors benefit from the huge opportunities provided under the AfCFTA.

 

Prince I. Nwafuru, MCIArb (UK)

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Lagos, Nigeria

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Repricing of yields reduces activity level in January

For foreign investors, outflows fell to N30.8bn (US$78.3m) compared with N48.8bn (US$124.5m) in December.

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dollar foreign debt, Foreign investors trapped in the debt market as dollar scarcity persists, U.S dollar gains, America sanctions Chinese Airlines from flying into the U.S. , U.S dollar gains, America sanctions Chinese Airlines from flying into the U.S., U.S Dollar Remains Firm, Global Investors Rush Into Safe Haven Assets

Based on the data released by the NSE on Domestic & Foreign Portfolio Investments for January 2021, total value fell 13.7% m/m to N232.5bn (US$590.8m) from N269.2bn (US$687.1m) in December 2020. Furthermore, total value declined 1.27% y/y to N232.5bn (US$590.8m) in January 2021 from N235.5bn (US$600.8M) in January 2020.

Activity level among domestic investors decreased 7.2% m/m to N184.9bn (US$470.0m) while foreign investor transactions also took a dip, down 32.0% m/m to N47.52bn (US$120.78m). Domestic investors still retained dominance of trading activities on the local bourse as their share of total transactions in January stood at 79.6%.

On the domestic front, transactions were dominated by institutional investors who traded N117.5bn (US$298.6m) while retail investors executed transactions worth N67.4bn (US$171.4m). Notably, the volume of transactions declined 14.9% m/m at the institutional level contrary to an increase of 10.16% m/m at the retail level.

For foreign investors, outflows fell to N30.8bn (US$78.3m) compared with N48.8bn (US$124.5m) in December. In the same vein, foreign inflows decreased to N16.7bn (US$42.5m) in January from N21.1bn (US$53.9m) in December, resulting in a net outflow of N14.1bn (US35.7m) compared with a net outflow of N27.6 (US$70.5m) in December.

Looking ahead, for as long as yields in the fixed income space continue to rise, the equities market will continue to take a hit in our view. In the near term, we believe good corporate earnings and dividend announcements will support some stocks in the equities market. We, however, expect FPIs to retain apathy towards the Nigerian market in the short term, though the inability to source FX for repatriation may continue to force reinvestments.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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