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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.

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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?

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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).

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.

[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.

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

  • 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

Power: Nigeria’s deal with Siemens – the birth of a new era?

Siemens’ position in the power value chain remains unclear given the huge investment it is committing.

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Power: Nigeria's deal with Siemens - the birth of a new era?

Recently, the Minister of Power, Sale Mamman disclosed that the power deal between Nigeria and Siemens AG, a renowned German firm, will lead to the upgrading of 105 power substations and construction of 70 new substations across the country. The Minister also disclosed that the Federal Government had made an initial N8.6bn commitment in the transaction. We recall in July 2019, Nigeria and Siemens signed a power sector deal which provides a blueprint on improving power generation and fixing the archaic transmission and distribution infrastructure in the sector. Notably, the president set a goal of achieving 7,000MW and 11,000MW of reliable power supply by 2021 and 2023.

READ MORE: Chinese Loans: Clauses are international standard terms – Amaechi

Siemens’ position in the power value chain remains unclear to us given the huge investment it is committing to make. Currently, the Transmission Company of Nigeria (TCN) is 100% owned by the government while the Gencos and Discos are privately controlled. While we see a possibility of Siemens getting a stake in TCN, we struggle to see how that will work for the discos and gencos given that Siemen’s huge invesments may mean they have to cede
control. Also, government’s desire to maintain a stranglehold on the power sector in bid to regulate electricity tariffs remains a key risk to any investment in the sector. We are also sceptical on Siemen’s ability to recoup its investment given that the liquidity squeeze in the sector attributable to non-cost reflective tariffs remains unresolved.

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Over the years, the widening deficiency in on-grid supply of power has forced consumers into costly off-grid alternatives, which account for 52% of electricity consumption, based on IMF estimates. According to the world bank, about 80 million people still lack access to grid electricity, making Nigeria the country with the largest access deficit in Sub-Saharan Africa. The institution further puts the national electrification rate at 55%, with rural electrification rate at a meagre 39%. Clearly, a lot of work is required in improving the supply of power across the country and ensuring its availability to unserved and underserved households and businesses.

READ ALSO: Delay in passing PIB creating uncertainties in Petroleum Industry – WEIN 

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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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Columnists

No trophy for International Breweries after bland Q2 results

Brewing companies have found few and fewer opportunities to consolidate and generate quality turnover.

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No trophy for International Breweries after bland Q2 results

International Breweries Plc closed with a net loss in the second quarter (Q2) of 2020. They made a revenue of N25.3 billion, 28.5% shy of their achievements in the opening quarter (Q1) of the year.

Cost of sales consumed virtually all the revenue generated, taking as much as 86% in Q2 and 82.5% in Q1. This has been the sad trend/trajectory for International Breweries which ultimately almost guarantees that they close their books with a loss.

READ ALSO: Guinness Nigeria boss reveals factors pulling company’s profit

International Breweries Plc is a brewery company in Nigeria with its flagship product being the Trophy Bottle. Other products include Hero Lager, Eagle lager, Eagle Stout, and Beta malt. They have managed to improve revenue but haplessly struggles with rising costs of production and expenditures. The effect of government regulations, with the new excise duty implemented in 2018 hasn’t been palatable. Brewery companies generally do not have the luxury of tweaking their prices at any point in time to improve their topline. This is as a result of the immense sensitivity of the industry where increasing the price of a bottle instantly delivers the customer to the competition, albeit on a silver platter.

COVID-19 stalled operations and interrupted the accustomed seamless flow of activities around the world. Brewing companies have found few and fewer opportunities to consolidate and generate quality turnover. April 2020 ushered in a lockdown of vehicular movements and operations across major cities in the country. Bars, Clubs, Weddings, and other avenues for merriment, which hitherto are hubs for amassing turnover were given secondary attention until further notice. For companies in the industry, sales ordinarily would plunge, in light of these factors. Whilst we acknowledge and recognise the negative impacts the pandemic has wrought, it isn’t entirely accurate to allot all of International breweries travails to this.

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READ ALSO: Apple market capitalization nears $2 trillion, as Apple’s CEO becomes a billionaire

International Breweries, with the figures generated appears, nears its demise. Retained earnings for H1 showed a negative of N12.2 billion, this suggests that the company has made consistent losses. It also has borrowings amounting to over N107 billion naira secured by corporate guarantee with interest ranging between 7%-13%.  And with the ever-increasing negative value for retained earnings, death has been slow but consistent and almost inevitable.

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The statement of cash flow for H1 2020 exposes the true sources of cash inflow for International Breweries Plc. Only 5% were derived from operations, 0.8% from investing activities, and over 90% representing N162 billion from financing activities particularly rights issues.

International Breweries is in sinking sand and must devise new solutions quickly if it entertains any hopes of prolonging its longevity.

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Telecoms sector remains resilient as broadband subscriptions climb

Broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May.

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Telecoms sector remains resilient as broadband subscriptions climb

Despite the adverse impact of the global pandemic on various sectors in the economy, the Nigerian telecoms sector has remained resilient. According to recent data on key industry fundamentals published by the Nigerian Communications Commission (NCC), the total number of broadband subscriptions grew 23.9% y/y and by 2.8% m/m in June 2020 to 78.8m subscriptions.

Similarly, broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May. In addition, the number of internet subscribers continued to grow in June 2020, up 1.8% m/m and 17.2% y/y to 143.7m subscribers. We believe the m/m uptick in broadband penetration could be due to gradual reopening of the economy.

READ MORE: Exxon Mobil, Chevron record their worst losses in history

We recall that subscriptions declined on a m/m basis in April but showed recovery in May & June, reflecting the resilience of the sector. Industry players in the telecommunications sector continue to invest heavily in internet infrastructure in a bid to improve 4G LTE coverage across the country. Heightened competition among industry players for market share has also forced bundle prices lower, making internet usage very attractive to the average Nigerian.

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READ MORE: Federal Government to introduce new laws for online businesses  

With the advent of the global pandemic, we believe the growing use of digital channels for daily routine activities ranging from telecommuting, entertainment and social engagement bodes well for continued growth in internet penetration. This will be further supported by increasing smartphone penetration, favourable country demographics and a fledgling social media culture. Nevertheless, we believe the sector still requires more investment to bring it at par with more developed climes. With internet penetration still below 50% (39.58% as at April 2020), we think significant potential exists for telecom and internet service providers in Nigeria.

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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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