Borussia Dortmund: A Business Transformed

While Borussia Dortmund’s (BVB.DE) recent on-field heroics may be hard to match underlying profit progression marks this management’s turnaround of the business, and positive development of its powerful brand, on a platform of sustained playing success. A material long-term boost to domestic TV rights reduces concerns about player wage pressures and consumer spend, while disciplined finances hold the company in good stead in a market subject to growing regulation. This year’s likely step change in pre-transfer EBITDA should be a catalyst for the underrated share price.


Coherent strategy
This management has transformed the company’s fortunes since near-bankruptcy in 2005. It is successfully pursuing a well-defined strategy centred on developing core revenue sources such as broadcasting, advertising, match operations and merchandising. It is maximising success on the field without taking on new debt, while achieving a balance between financial and sporting interests.

Major uplift in profit before transfers
The current year could see a near 50% increase in underlying EBITDA even before lucrative rewards for success in its imminent Champions League semi-final against Real Madrid. Such progress is impressive in view of substantially higher costs associated with the club’s new star signing, Marco Reus, key contract renewals, merchandise expansion and stadium refurbishment. Although a €4m transfer gain on completed transactions is included in our forecasts, the boost could well be material, given the newly-announced end of season sale of Mario Götze. FY14 may also surprise as we have not allowed for Champions League participation beyond the group stage (qualification is now confirmed). Reaching the semi-finals, as this year, could earn additional €12m UEFA participation revenue alone. Company finances are strong (net cash is in prospect for FY14e even before transfers).

Valuation: Underrated
The company’s success in creating a sustainable business is not being recognised by current valuations. Despite a lack of comparable peers, an EV/EBITDA (pre-transfer) of just 4.5x FY13e ignores the long-term potential of strong brand development, valuable media rights and sustainable cash flow, backed by freehold property and substantial subscription revenue, and hidden reserves from player development. More reasonable would be 5x (share price €3.70), as would a P/E of 7x (€4.30). Free cash flow yield of 7% would be justified by the sustainability of cash flow (€4.60). EV against resilient and growing revenue is only 1.0x prospective.

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