Fool's Eye View

[ October 2, 2000 ]

Manchester Shaken

By Rob Davies (TMFEssex)

Colchester, Essex. Earlier this year there was a strong campaign to pick Manchester United (LSE: MNU) for the Rule Shaker portfolio. In one of that portfolio's better decisions it decided not to. Today's poor results from the club demonstrate how sensible that was. Choosing shares is a tricky enough business at the best of times. Combining it with the tribal loyalties prevalent in such a passionate game as football is going to make rational decision making even more difficult.

The top line figure in the results looks good. Revenue rose 3% to £116m, but that in itself is only just beating inflation, suggesting that there is not much organic growth. But the news from there gets increasingly worse. The operating profit fell 7% to £30.1m, and the reason for that was a horrifying 20% rise in operating costs to £65.8m. And that was before the player amortisation cost of £13.1m, up by £2.9m on last year. Add that in and the profit before tax falls from £22.4m to £16.7m. At the bottom line a similar trend is apparent. Basic earnings per share fell from 5.9p to 4.6p, but even with the company's adjustments it couldn't get the massaged figure above 8.1p compared to last years' 8.8p.

In cases where companies have large non-cash charges in the profit and loss account, such as is the case with amortisation of players in football clubs, it often makes more sense to look at the cash flow. Sure enough the figures here do seem to support the chairman's upbeat statement. Cash flow from operations was 10% higher at £35.7m. While that is good news the £33m spent on fixed assets is less so, and that was the major cause in the sharp decline in the company's net cash position from £37.5m to £10.5m.

Hanging over all football clubs is the uncertainty created by the European Commission, the so called Bosman review, on transfer of players. In the worst case scenario that could wipe out the £32.3m of intangible assets represented by players on its books. Although that in itself would not be disastrous, although painful, the real problem is that players could walk away from the club leaving it poorly placed and with no compensation. Much the same of course happens with high profile people businesses like investment banks, advertising agencies and so on. In that respect football clubs have always been an anomaly. The chances are that they will fall into line with everyone else, rather than the other way round.

An interesting side note to the accounts is that the company has had to provide an extra £1.3m to top up the Football League's defined benefit pension scheme. Employees will have to fund the balance of the £12.5m to make good the full deficit.

Well, the good news, for some is that Man U is back in the FA cup this year, so it ought to recoup the £5m in gate receipts it lost last year by not participating.

For more totally biased discussion on the shares take a look at the Manchester United and Football discussion boards.