With negative cash flow and a new stadium to fund, Spurs' shares are for fans only.
Before I try to set out a case for Tottenham Hotspur (LSE: TTNM) being a rather risky punt for the future, I'd like to own up to being a bit biased. No, I don't hold shares in this football team. I'm a Hammers fan. But I'll try and be objective in setting out the case for and against investing, especially as my editor is a Spurs supporter!
Recent results
On the face of it, the latest results for the year ending 30 June 2009 appear to show a business doing well. Pre-tax profits of £33.4m compared with only £3m in 2008.
However, closer inspection reveals that these results were boosted by a trading profit on buying and selling players of £56.5m (compared with £16.4m the previous year). If these profits and the amortisation of player registration costs are disregarded, its actual operating profits were down quite considerably on the previous year, dropping from £27.4m to £18.4m.
Overall turnover was very slightly down at £113m, against £115m a year earlier. This was primarily due to merchandising revenues dropping to £6.9m (2008: £9.7m) and receipts from cup competitions falling to £8.0m (2008: £10.3m).
Positives
Of course one great thing going for the club is that it has a very loyal supporter base centred in North London. Demand for season tickets is such that there is actually a waiting list of 23,000 for them -- which is why Spurs want to develop a new, larger stadium.
They need to break into the top four of the Premiership and have a good run in Europe to have much chance of fulfilling their ambitions in the short term. I actually think they can do it, they've got a very talented group of players and their manager, Harry Rednapp (affectionately known as 'Bagpuss') is a great motivator and skilled wheeler-dealer who knows the game inside out.
Attendance figures and sponsorship deals should continue to be lucrative. Tottenham is currently looking for a shirt sponsor and if it matches the current deal with Mansion it would bring in £34m over four years. In addition, TV revenues continue to increase.
Issues
Spurs certainly have ambitions but a question mark remains over whether they can actually deliver. I'm concerned that their expansion plans for a new training centre in Enfield and a new stadium, known as the Northumberland Development Project, may lead to them overreaching themselves financially.
In August, Spurs raised £15m by issuing 50m new shares at 50p each. Of the 30m shares placed, 27.8m were taken up by the company's majority shareholder ENIC, which now owns 77% of the issued share capital. Tottenham chairman Daniel Levy has an interest in ENIC, which is controlled by the billionaire Joe Lewis.
Tottenham already seem to be reliant on ENIC from a funding point of view and the club is fortunate that its purse is pretty big. Net debt at Spurs doubled from £30m last year to £60m as at June 2009. As well as rising player wages, transfer fees also gobble up cash. Perhaps the clearest indication of this is the club's dividend record. Over the last ten years, despite turnover nearly quadrupling, dividends were only paid in 2007 and 2008 (4p each time).
Spurs recently submitted a planning application for their new 56,000-seat stadium and hope to be playing at the venue by 2012, provided planning permission is granted next year. The site will also include 434 new homes, a 150-room hotel and a supermarket. However, it is going to very expensive to develop and there could be a significant dilution of the shares going forward. Tottenham have not declared the anticipated cost of the stadium project, but reports have suggested that it is likely to be close to the £400 million Arsenal spent on the Emirates.
Conclusion
Given the risks with developing the new stadium, I certainly hold off investing until the cost and how it will be financed becomes clearer. On a crude P/E basis, at 75p the shares may just be on a P/E of 3, but transfer-based profits aren't a reliable of income and the underlying cash situation is a fairer reflection of the true worth of this business. For this reason, I reckon an investment is for diehard Spurs fans only.
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