Goals Soccer Centres plc is a UK based operator of five-a-side soccer facilities with 44 sites. 43 are in the UK and 1 is in Los Angeles and all are leased on long term leases from local municipalities. The company is run by the founder, who pioneered commercial five-a-side soccer in the UK and is currently one of the largest holders with 7.9% of the company's stock.
Multiple short term problems have been obscuring the durable earnings power of this business. These issues are resolving and we think EBITDA will increase 33% between now and the end of 2015. This will allow deleveraging and further growth at high returns on capital. As a result, we expect an IRR of close to 30% on the position through 2015 with no increase in the company's EV/EBITDA rating and potentially attractive continuing growth thereafter.
We began looking at it after the stock suffered when shareholders rejected a private equity bid in July 2012 and instead undertook a placing in September 2012 to pay down debt, which had grown significantly to a peak of 4.5x EBITDA due to site rollout and one off factors that were depressing earnings.
These factors included:
1. A large pipeline of immature sites that price at up to a 25% discount to mature sites for the first five years of their existence.
2. Significant weather related disruptions in soccer play as the UK has had the worst winter in the previous 50 years each of the last 3 years (with each one obviously worse than the last).
3. The effects of the recession, which were disproportionately felt by the young men who are Goals's prime customers. This had the biggest effect on their ancillary revenues from bar use and birthday/corporate parties rather than regular game play.
4. An increase in sales taxes that raised taxes from 0% to 20% on league soccer games that was applied in 2011. Goals absorbed half of this and passed half to the customers. This tax increase was subsequently fully overturned on appeal in September 2012.
We expect net debt to be below 3.0x EBITDA by year end due to debt paydown and higher earnings, and this will enable them to resume expansion. Three sites are already underway.
Business Description and Competitive Position
Goals operates 43 UK sites and Power League, their other large (and PE owned) competitor has 46 facilities (there is also a much smaller third operator with 14 sites). These companies partner with municipal authorities and schools to develop facilities that are used by community groups during non-peak hours. Since municipal authorities are not primarily concerned with profit maximisation, Goals is able to secure rental terms of over 50 years at low rates and their reputation and track record of working well in communities and in close proximity to children acts as a significant barrier to new entrants. No new companies have entered the market since 2004, even though the number of sites across the country has more than doubled since then, which shows the significant barriers to new entrants. These new sites are often in better cities than the old ones, since the concept is now more accepted by local governments.
This lack of competition for sites and ability to build facilities on public property without paying market rents for scarce UK land has allowed Goals to deploy capital at a post tax return of over 11% historically. Sites typically break even within a month of opening and generate close to £400k of EBITDA on revenues of about £850k. New sites cost £1.5 million, (down from £2.2 million thanks to modularization) and have low maintenance capital needs so cash on cash returns are excellent.
There are approximately 2.0 million weekly players of soccer in the United Kingdom and in recent years the smaller five-a-side format has been gaining share. Soccer play, especially by members of leagues, who are the largest customer group, is very economically resilient. Like for like football revenues fell only 5% during the post 2007 recession, though economic conditions do impact the speed at which new sites ramp up and the ancillary revenues from bar use, birthday parties, and corporate events.
The business has raised prices by an average 2-3% a year since its 2004 IPO and sees no change in player activity in response to this rate of price increases. The company's pricing power was underscored when the government imposed a 20% sales tax on league football games in 2011. The company passed through half of the expense but utilization did not fall, though that was the only year the company didn't raise its own prices. We have tracked the pricing at every site for Goals and Powerleague across the UK in recent months and note that the company raised prices successfully in October 2013 at all its sites, especially at its more immature ones. This price increase is yet to be reflected in reported earnings or analyst reports, which are expecting flat revenues.
Current Valuation and Earnings Normalization:
Goals currently has a market cap of close to £100 million and earns close to £9.0 million of free cashflow ex growth capex. LTM EBITDA is £14.0 million on a company with an EV of £151.4 (£100 million of equity and £51.4 million net debt) yields an EV/EBITDA of 10.8. We believe Goals's EBITDA will increase 33% over the next several years from several factors.
1. Price increases: Completed price increases, maturing of new sites to match pricing on old sites and raising mature site prices again by 2% (less than historical averages) each year mid year will raise 2015 EBITDA by £2.4 million. This is realistic in light of their historical pricing power and the quality of their immature site locations, which we have analysed.
2. Utilization normalizing: A recovery in the existing sites to pre-recession volume levels after the 5% drop and an increase in new sites to match the volume of old sites should increase EBITDA by £1.4 million. We believe this is realistic if economic and weather conditions normalize.
3. Partially offsetting this, costs will also rise. Using a cost inflation of 3.5% per year (which is above the rate historically) on all costs including from rent resets on sites coming up for rent repricing (which is struck based on CPI every five years) reduces 2015 EBITDA by £1.7 million. This implies shrinking margins on mature sites, which we think is conservative.
4. The least certain but potentially very juicy piece of return would be a recovery in ancillary revenues. As the British economy recovers, revenues from bar sales and birthday parties, which are more cyclical, are likely to recover somewhat. If they recovered to peak levels (which we don't expect) it would increase EBITDA a further £3.4 million.
Analyst estimates show flat earnings despite the fact that these factors should drive significant revenue growth at very high incremental margins (close to 100% for non ancillary revenue). Further, analysts are penalizing the company for capital expenditures spent on new sites without adding any corresponding revenue. In light of Goals's significant growth pipeline, we think this is a mistake.
Growth and debt paydown
In fact, there is further scope for expansion at even higher returns on capital than in the past. The company is deploying a new modular site format that cuts capital required to build a new site from £2.2 million to £1.5 million, which raises post tax returns on capital to 17%. An analysis of all UK metro areas suggests the industry has scope for at least 40 more sites, which will likely be split evenly between Goals and Power League. Right now Goals is speaking with a number of local governments and has agreements with municipalities for 3 new sites, which will raise EBITDA by almost £1.0 million in the first full year they open and over £1.3 million at maturity. These will cost £4.5 million in capital expenditures, which Goals can easily afford while still paying down debt by at least £18.0 million, all of which value should accrue to the current equity holders (on a current £100 million market cap) between now and year end 2015. We have analysed catchment areas and site locations for each of the competitors across the UK. Given the complexities of the zoning process and the amount of population not yet served, we expect to have many more years of roll out at high returns, which could make the stock interesting for many years to come.
Return Bridge based on 30 June 2014 financials and 13 January 2014 market cap (in millions):
LTM EBITDA: £14.0
Net Debt: £51.4
Market Cap: £99.7
EV/EBITDA = 10.8
+ Price Increases of £2.4
+ Volume Normalization of £1.4
+ EBITDA from 3 new immature sites of £1.0
+50% of peak ancillary EBITDA recovery of £1.7 (50% of £3.7 peak to trough decline)
- Cost inflation of £1.7
Ending EBITDA: £18.6
EV at 10.8 multiple: £201.1
+FCF of £9.0 for 2.5 years (from mid 2013) of £22.5
-Growth Capital Expenditures of 3 sites at £4.5
= Cash for debt paydown of £18.0
Ending net debt £33.4, Ending equity of £167.7, Equity IRR = 30.4%