Companies: PWR   

According to executive chairman Claude Littner, his company has three core advantages over its rivals in one of the most attractive niches of the leisure sector. ‘We possess strong asset backing, we have good brand recognition and we have growing sponsorship income,’ he expounds.

What he could also have mentioned is that Powerleague, an operator of five-a-side football centres, is not only one of the longest-running ventures in the market (it was set up as far back as 1987) but it has the kind of visibility of revenue streams that all growing ventures aspire to, regardless of what trade they are engaged in.

Strategy
The business goal this year and beyond is very simple: to maintain its position as the leading branded operator of commercial five-a-side pitches in the UK – ‘and make a hell of a lot of money in the process,’ adds Littner.

The group currently operates a total of 33 floodlit five-a-side centres around the country and has no less than 85,000 players using these facilities per week. In all, there are 339 pitches, giving the business a 50 per cent share of the ‘branded’ five-a-side market dominated by itself and Goals Soccer Centres (see table below). Most of the rest of the private market consists of smaller operators.

Fully affiliated to the Football Association, Powerleague organises all manner of local, regional and national football tournaments and league competitions, boasting great relations with the local populations and commercial enterprises.

‘We appeal to a wide range of age groups and interest groups,’ informs chief executive Sean Tracey, ‘who are not only attracted by our first-class facilities, but by our level of service and tempting pricing model. For around £5 per person per match, eager footballers get quality surfaces, floodlights, great changing facilities and wonderful areas in which to socialise afterwards.’

The popularity of its sites is partly explained by Powerleague’s own research, which apparently shows that five-a-side is the ‘fastest-growing and most popular sport in the UK – more so than 11-a-side’, asserts Littner.

The growth in its own estate and the attractions of the wider game enabled the group to hoist sales 21 per cent to £9.5 million in the half-year to December. Operating profits leapt 19 per cent to £1.9 million and profit before tax more than doubled to £1.4 million.
Free cashflow from operating activities was £2.6 million – up from £1.5 million last time.

‘Pitch income was up 5.7 per cent,’ claims Tracey, ‘with utilisation rates running at 75-80 per cent. But the impressive figure for me was the improvement in sponsorship and events income, which jumped seven per cent.’

This aspect of the business is impressive . The mighty Microsoft’s Xbox operating arm sponsors the group’s eponymous league. Budweiser is another core sponsor, as is the Barclays Premiership and Lucozade. Its newest corporate deal was signed with Braun, an official sponsor of the Germany 2006 Football World Cup.

‘The opening up of new sites [two opened in the six months to December] and the continual exploitation of our brand is the strategy we will be following in the months and years ahead. This is a highly fragmented market where we have made a name for ourselves. As long as we can keep the punters happy and margins strong, our business model will thrive,’ assures Littner.

Management
Few management teams in this arena know the market as well as those running Powerleague. Littner, a corporate turnaround specialist, joined as chairman in June 2001 in a bid to rejuvenate its fortunes. Prior to this he had spent seven years keeping Tottenham Hotspur on the straight and narrow as chief executive. Before Spurs he was chairman and chief executive of Alan Sugar’s Amstrad International, Amstrad Spain and Dancall Telecom. At present, the amiable Littner fills in as chairman of Asco, Enviroco and holds a non-executive post at Blacks Leisure.

Sean Tracey is even more steeped in this particular sector, with no less than 14 years’ experience. Tracey was first employed by Anchor to run what is now Powerleague’s Glasgow site. His job titles since then have included new site openings manager, national sales manager, sales director and now chief executive. It is doubtful if anyone in the UK knows more about the growth of the commercial five-a-side business.

In the finance chair sits the very capable Sheena Beckwith. She was previously finance director of BAA’s Prestwick Airport, playing a key role in its sale first to Stagecoach, and then to Infratil. She joined the board in 2002.

Prospects
Gauging the prospects of this business, at least in the short term, is not too difficult – largely due to the aforementioned revenue visibility.

The bulk of annual revenue comes in the form of bookings paid for in advance; 35 per cent of sales are derived from those who participate in the group’s leagues with 29 per cent from punters who just wish to have a guaranteed court for themselves and their friends, week in, week out.

‘Both groups exhibit strong team loyalty and centre loyalty. The rolling league and block-booking gives this venture great defensive qualities,’ says Tracey.

Another 19 per cent of revenue is derived from the bars at the centres – ‘a stable form of income’ – while a mixture of commercial income streams, tournaments, vending and ‘casual players’ make up the rest.

In terms of the existing estate, growth will be derived from expanding and improving the facilities. This consists of upgrading pitches (a new rubber pitch is proving very popular among players), adding new pitches, or developing gyms at the centres.

Says Littner: ‘we’re very careful to ensure that when we invest in the existing estate, the payback is quick. For instance, we invested £150,000 extending the gym at our Manchester site and we expect a 100 per cent return in one year – but don’t anticipate an attendant increase in operational costs.’

As for new sites, two were opened during the first half of the year – a £1 million venture at Kilmarnock and a £1.3 million one at Basingstoke. Both were ‘EBITDA positive in the first full month of trading’ with a total of 280 teams signed-up before the doors were even open. ‘At Kilmarnock we’re averaging £1,000 per week, with Basingstoke chipping in £800 every seven days.’

In general trading, ‘like-for-like pitch income is running 5.7 per cent higher this year and, despite adding 20 new pitches since September, average pitch income is only slightly behind schedule. With pitch utilisation rates at 75 per cent, we can see a route to expand without hiking prices or increasing costs.’

In terms of new sites, the plan is to open another one in this financial year, four in 2006/07 and four the year after. ‘We want controlled growth, although if we spot an opportunity, we don’t doubt we will have the financial muscle to carry out the deal.’

The other main area of growth is its local network partnerships and corporate sponsorship deals.

As well as having great contacts with local schools and councils, the high quality of many of Powerleague’s facilities has attracted an array of corporate partners.

In total, it runs 14 national corporate events at ‘off peak’ times for the likes of Sainsbury’s, Barclays, Securicor and John Lewis. Then there is the array of actual sponsorships. It sports a two-year deal with Budweiser, signed a new contract with Nike in November last year, will run a new national event with Braun and has even bagged a new three-year sponsorship and supply deal with Lucozade. And of course, there is the Xbox partnership. The logo of the gaming giant is plastered everywhere Powerleague’s name appears (even on its end of year financial results).

‘Right now, our future is about maximising revenues from the pitches we have, improving corporate sponsorship deals and the roll-out of new sites in a measured fashion. In this World Cup year, we are of very confident of getting the returns we require,’ concludes Tracey.

Valuation
House broker Evolution expects Powerleague to produce total sales of £20.97 million for the year to June. Operating profits should hit £7 million and earnings per share 3.6p. At the current 70p, that puts the group on a forward p/e of 19.4. Not what you would call very cheap, but hardly racy for a company growing sales and profits by over 30 per cent.

Net debt was £16.1 million in 2005 and should fall to £14.9 million in 2006. Again, while not perfect, it’s worth noting that 50 per cent of cash inflow is being used to service this debt. Interest is suitably covered by earnings before interest, tax and amortisation 5.6 times.

When you throw in the defensive qualities of its revenues, the growth of the sector, the sponsorship opportunities coming its way and the undoubted excitement of consolidating a fragmented and attractive niche, the investment case at Powerleague becomes compelling. And it has got a great management team to boot. Buy.