Goals Soccer Centres is listed on Aim and is an operator of 5-a-side soccer centres with 45 in the UK and one in Los Angelis. The group derives revenues from customers using their football facilities which includes revenue from leagues operated by the group, revenue from customers who use the facilities to play on a non-league basis, corporate events, children’s birthday parties and children’s coaching. The revenue is recognised once each game is complete. They also derive secondary revenues which include soft drink vending, bar sales, confectionary vending and revenue from sales of football equipment. Goals Soccer Centre has now released its final results for the year ending 2014.
Overall revenue increased when compared to last year with an £823K growth in UK revenue and a £100K increase in USA revenue which represented a 3% headline increase and 2% like-for-like growth. Cost of sales also increased to give a gross profit some £627K ahead of last year. Wages remained fairly flat but rent rates and insurance saw a £150K increase, partly offset by a fall in depreciation and audit costs, the former resulting from an extension of the useful life of pitches from 7 to 10 years which reduced depreciation by £286K. Pleasingly operating lease costs fell by £405K year on year but at £2.2M they were still substantial for a company of this size. Other operating costs saw a fairly sizeable fall but this year the group saw a £571K charge for bad debts that meant some receivables had to be written off. This pushed the operating profit down £505K when compared to last year. We then see a substantial fall in interest on the loans more than offset by a £2.2M charge relating to the cancellation of the interest rate hedge and a £500K charge for the bank arrangement fees written off which, together with an increased tax bill as last year benefited from a reduction in the deferred tax liability due to the fall in the UK corporation tax rate, meant that the profit for the year stood at £5.1M, an decline of £3.3M year on year.
When compared to the end point of last year, total assets increased by £5.7M driven by a £2.6M increase in leasehold property, a £1.7M growth in assets in the course of construction and a £1.7M increase in software development. Total liabilities fell during the year as a £9.5M fall in secured bank loans, the eradication of the interest rate derivative, which was a liability of £2.6M last year, and a £1.1M fall in current tax liabilities was partially offset by a £1.2M increase in the deferred tax liability, relating to timing differences. The end result is a £15.2M increase in net tangible assets to £71.7M. This is a much improved balance sheet from last year and appears to look strong at first glance but it is propped up by the £105M worth of leasehold property and the corresponding outstanding operating lease is off the balance sheet which to me seems a little misleading.
Before movements in working capital, cash profits fell by £3M to £11.7M. After a moderately favourable working capital movement due to a small increase in payables and a higher tax charge than last year, the net cash from operations stood at £9.9M, a fall of £383K when compared to last year. The group then spent £6.4M on property, plant and equipment relating to £4.5M incurred on new centres, £200K on IT and £1.7M on upgrading the mature centres, along with £1.8M on computer software and they also spent £1.3M on interest to give a free cash flow of just £400K, which was not enough to cover the £1.1M in dividends before the group raised £10.6M from a share issue to pay back nearly £10M of that massive debt pile. For what it’s worth, the cash outflow for year stood at £34K and there was a negative £131K cash level at the year-end.
The group remains confident in the long term growth potential of the UK market and with limited competitor activity and relatively high barriers to entry, they believe they should be well placed to realise this opportunity. 5-a-side football is increasing in popularity in the country and is now fully recognised and supported by the FA with all of the group’s centres being FA accredited.
The centre in Los Angelis continued to show strong growth with sales up 13% and is one of the top performing centres in the portfolio. The board believe they now have a strong understanding of the LA market and they are in advanced discussions on a number of sites within the metropolitan area and have agreed headline terms on two sites, one of which should open in the second half of 2015, although the process of site acquisition is more complicated than in the UK.
Sales in the UK centres increased by 2% on a like or like basis with football revenues increasing by 1% (82% of total sales) as a one off activity worth £300K with a large corporate customer was not repeated in 2014 and the group delayed their usual post summer price increase until January; bar and vending sales increasing by 5% as increased football volumes and the general recovery in the economy increased midweek bar sales; and other revenues falling by 9%. The increase in average overheads per centre was just 1% due to a number of efficiencies but next year, centre costs are likely to increase by 4%. The centre EBITDA increased by 2% to £17.2M but as a result of the planned increase in UK head office costs, the EBITDA generated by the UK business fell by £100K to £14.3M. Sales at the US business increased by 13% to $1.7M and centre EBITDA increased by 19% to $800K which relates to about £600K. The costs of operating the US head office remained flat at £100K.
The new mobile app and website were launched at the end of the year which provides an improved experience for customers with downloads of the app running ahead of expectations with over 20,000 to date. The app is designed to reduce frustration for team organisers when they struggle to find sufficient players or are let down by players calling off at the last minute which can sometimes result in a team organiser deciding not to continue. The app includes the ability to invite, select and manage players with their own pool; direct player payment where organisers can invite selected players to pay their share of the game fee direct to Goals and monitor who has paid; player blast, which provides the ability to seek a replacement player from their own squad, Facebook friends or a local Goals centre database for players who are up for a game. The app also enables the ability to book a pitch at any time and includes a league fixtures and results functionality that was previously only available on the website.
Additionally the “Up For a Game” functionality allows individual players to register their details and availability after which they can be selected via the player blast function by team organisers or groups of similar players brought together by Goals to form new teams. Since the launch, almost 1,000 player blasts have been sent with a 90% acceptance rate enabling some games to go ahead that would otherwise have been lost. In total about 6% of all games are now being organised through the app.
During the year the group appointed a Social Media Manager to work alongside the e-commerce and marketing manager in order to increase focus on social media with the group experiencing an increasing number of enquiries through platforms such as Facebook and Twitter. They have also launched a Play5s-GetFit campaign which promotes the health and fitness benefits of playing 5-a-side football. Marketed heavily on Talksport radio, they have included activities in branch including team weigh-ins and fitness boot camps. The group has attracted a number of national events including the annual Powerade Fives, Kia Cup, The Warrior Fives, Skins Cup and retained the official partnership of Movember with teams winning the opportunity to attend the World Cup in Brail.
Additionally, the group holds national tournaments for corporate clients such as McDonalds, Wetherspoon and Odeon but due to the loss of a significant one-off activity that occurred in 2013, like for like corporate event and sponsorship sales decreased by 11% year on year. In the autumn, the September uplift campaign was launched to encourage players who had taken a break over the summer holiday period to get back into the game with offers promoted through the support of the FA. During the year the group played host to over 500 teams as part of the FA Reds vs Blues tournament and in February 2015 they saw the launch of the FA Peoples Cup with almost 4,000 teams taking part in total with Goals playing host to some 1,700 of these teams. A major Kids Party promotion through digital channels has delivered a 65% increase in bookings since the start of 2015 on top of an already strong year in 2014.
The group has developed goals-cam technology which is now being rolled out across the business and will be live on the new website. This technology records game highlights from two different angles and makes a 20 second highlights clip available to players for download or for sharing across social media. The pilot installations have been proven successful, and created another way in which to spread the brand across social media. In addition, the group are now rolling out their new “Soccer Blast” product, a kids party experience aimed at older children and youths.
The group has committed £742K in capital commitments at the year-end which have not been provided for but by far the biggest issue in my view is the outstanding operating lease commitments of a staggering £140.7M, although this has reduced somewhat year on year and the bulk of the commitments are payable in over five years’ time as they lease their sites for about 50 years in advance, this still makes me a little uneasy. I think the problem for me is that the balance sheet strength in underpinned by £105.4M-worth of leasehold property assets but these operating lease payments are obviously off the balance sheet – something doesn’t quite seem right about this to me, surely if the assets are being capitalised the lease payments should be included as a liability? Obviously this is not the case but it seems logical to me, is the asset possibly the deposits put down or something?
As can be seen, the group carries a substantial amount of debt. The secured bank loan has £26.8M outstanding with £5.4M currently undrawn, attracts interest at 1.2%+LIBOR and matures in 2019. This rate actually looks pretty good but the group will have to be aware of the likely increase in interest rates going forward. During the year the company closed outs its interest rate swap which had hedged interest rates at 3.9% this year and 4.4% next year which is rather excessive. An increase in interest rates of 100 basis points would have reduced profits by £37K this year. The vast majority of business takes place in the UK so there is little exposure to exchange rate changes but a 1% strengthening of the US$ would have decreased profit by £3K. An operational risk includes the impact of severe weather conditions with people clearly less likely to want to play football when it snows!
Customers are generally expected to pay in full prior to using the group’s facilities and trade receivables only occur when a pitch is booked and not utilised, or in relation to a limited number of corporate accounts. With the development of the new app the board have decided to re-engage with lapsed team organisers, which is expected to result in the group not fully recovering its existing debts which resulted in the £600K provision against bad debts. This suggests that there was little or no prospect of recovering the debt anyway so perhaps the group need to look at the way they provide for un-recoverable receivables?
After the end of the year, the group acquired a centre in Newcastle, opened a new centre in Manchester and have commenced construction on a new centre in Doncaster which is scheduled to open in April 2015. This site is using the new modular build concept that reduces capital expenditure and build time by 35%. All of these are cities where they have previously not had any presence.
Going forward, in the first eight weeks of the new year, sales have been flat as a result of adverse weather at the start of the year. Sales have strengthened in the past three weeks as the weather has improved. As a result of the new app and website, the strength of the core business, the expansion opportunity in the US and the improving economic backdrop the board are confident of making further progress in 2015.
I have decided to take off the interest rate swap cancellation but have left all other “non-underlying” costs intact so, at the current share price the shares trade on a PE ratio of 16.2 reducing to 13.6 on next year’s consensus forecast which does not look to bad on the face of it. After an 8% increase this year, the dividend yield currently stands at 1% on a rolling annual basis which is nothing to get excited about. At the year-end the group is in a net debt position of £36.9M which is a substantial improvement on the £46.4M recorded at the end of last year but still seems like a lot for a company of this size.
Overall then I have mixed feelings about this company. Profit fell year on year driven by bad debts, the cancellation of the interest rate swap and the write-off of the arrangement fees after some debt was paid back early thereby reducing the amortisation time for the fees. Net assets did improve as the issue of new shares was used to pay off debt but I remain uncomfortable about the leasehold properties underpinning the perceived balance sheet strength. Operating cash was down year on year and there was negligible free cash flow. I think in essence my issues surround the high debt levels, the massive operating leases off the balance sheet, the fact that the balance sheet strength is underpinned by these leases and the recoverability of receivables – it seems that if organisers owe money and decide not to carry on using the group’s centres, there is little incentive for the organisers to pay that money, as has been shown by the bad debt charge this year.
So far, this is all rather negative but there are some exciting growth opportunities for the group. The new app and website functionality really seems to add features that would encourage more customers to play games but the real opportunity in my view is the expansion possibility in the US. The Los Angelis site is currently decently profitable (more so than most of the UK sites) so there is a real opportunity here for the group. Closer to home, performance was actually a little disappointing with most of the growth actually coming from mid-week bar sales as the group lost a fairly large corporate event this year. At a forward PE of 13.6 and a dividend yield of 1% the shares look a bit expensive on current trading but the exciting opportunities for growth may yet sway me!
On the 7th May the group released an AGM statement covering trading so far in the year. During the year to date the company have opened new centres in Manchester and Doncaster and remain on schedule to add one further centre in the UK before the year-end. They are making good progress in the US and are in advanced discussions on several sites within the LA area and have so far agreed terms on two of these sites. As a result of the progress made so far, the group have appointed an experienced development director and the enhanced activity will increase costs by some £300K in the current year and in each year thereafter. After a difficult start to the year due to bad weather, sales growth has strengthened over the past months or so and the board are confident of making further progress during the year.
On the 9th July the group released a trading update covering the first six months of the year. Group sales were flat year on year at £17.1M with like for like sales down 1%. UK like for like sales declined by 2% as a result of adverse weather conditions in Q1 and some softness in the casual market. Trading strengthened in Q2 but it was not enough to recover the Q1 shortfall. The US business continued to perform strongly with like for like sales jumping up 20% as the centre’s popularity increases. The US site pipeline is developing with legals concluded, planning consent achieved and building permits at an advanced stage on one site with construction due to start in the second half of the year. Terms are agreed and legals have commenced on a further three sites.
Take-up of the new mobile app continued to grow during the period with total downloads in excess of 30,000. Use of player blasts have been one of the most used features which has helped reduce cancellations by sourcing additional players. A new app loyalty scheme is being developed to accelerate greater take-up of other features. In all the UK performance has been slightly below board expectations but they are encouraged by the ongoing strength in US trading. I feel that the UK performance has been rather poor with like for like sales declining but that US opportunity looks so tempting…
The chart doesn’t look to good so this is the reality check I need to wait on the sidelines for now.