In little more than a decade, Clipper Ventures has created and developed a highly profitable round-the-world yacht race. The next biennial Clipper race, starting in the autumn, is on course to generate sales surpassing £10 million, contrasting with Clipper’s current market value of less than £7 million. Pointedly, managing director Will Ward argues it would cost £20 million for a rival to develop a similar event.

The Clipper race was actually started by famous yachtsman and company founder Sir Robin Knox-Johnston. The first race took place in 1996 and the next will be the sixth, with Clipper Ventures owning the ten yachts taking part. Progress hasn’t been smooth and there was a three-year gap before the 2005-06 race so that the company could make changes to ensure the race would be profitable. However, Ward insists that ‘we have learnt over time’.

Significantly, the 2005-06 Clipper race generated revenues of £8.4 million and the next one will certainly make more than £10 million – house broker Blue Oar believes that figure could even reach £11.4 million. The expected income from crew members paying for training and each leg they participate in is more than £5 million.

Sponsorship revenues, which include money from cities sponsoring boats and/or paying to be a stopover on the race, should also sail in at around £5 million, with the final figure for sponsorship depending on the generation of specified levels of media interest. In the longer term, there is scope to find a race title sponsor.

Blue Oar believes that the 2009-10 race could generate £13.6 million. Ward puts the overall costs of the race at approximately £6 million and analysts expect a 2007-08 event operating profit of £5.7 million that could rise to £7.7 million for the 2009-10 race.

One negative for investors is the lumpy nature of revenues due to the fact that the Clipper race is run every two years. However, because the race falls in two financial periods, the effect of this is limited. There is some recognition of sponsorship revenues before the race, but revenue recognition is now mainly on a leg-by-leg basis (there being seven legs

to the race). Any bonuses from sponsorship contracts for additional media exposure are likely to be achieved later in the race.

Moreover, there are other ways of generating income. When they aren’t being raced, the yachts are used for training or corporate events. Ward insists that more than £300,000 of corporate business has been booked since January. Clipper Ventures is also offering a degree in sailing in partnership with Falmouth College.

In 2001, Clipper Ventures bought the 5 Oceans solo race, which takes place every four years, for $150,000 (£76,000). Roof windows group Velux has now been signed up as title sponsor and Ward believes the next race could generate £1 million.

The group raised £1.05 million at 15p a share in February to help with working capital. If broker Blue Oar’s estimates are met then Clipper Ventures should have net cash of £6 million by the end of April 2009. That isn’t much less than the current valuation of the company and tax losses should last until the end of the decade. A maiden dividend will be paid for the year ended April 2007 and there should be scope for increasing this dividend over time while keeping payouts well covered by earnings and cash flow.

Clipper Ventures is trading on around four times earnings for 2007-08. It would be difficult to buy such a high-profile event as the Clipper round-the-world race for £6.7 million. Management appears to have hit upon a cash-generative formula that is far from recognised in the current share price. Buy.