Sensitivity analysis

As described earlier in both chapter 5 (cost of capital) and chapter 4 (the financial analysis), a valuation like this one relies on critical and uncertain assumptions regarding key parameters such as the WACC, NOPLAT and growth. Therefore the sensitivity analysis is applied in order to test how sensitive the valuation is to these assumptions. The results are plotted in the figure below.

Scenario Weight Price

Base 75,00% 29,5

Best 12,50% 73,6

Worst 12,50% 12,9

Aggregate 32,9

Price on the stock market 24,0

Deviation relative to stock market price 37,2%

Deviation relative to base case 11,7%

Page 61 of 85 Figure 26 – the effect of change in selected key figures on BIF’s stock price

Here it’s seen that the company value is rather sensitive to changes in the parameters of the WACC. This is expected though, since the same WACC estimate is used to discount all forecasted future cash flows.

Instead, the interesting part is the value’s sensitivity to ROIC, NOPLAT growth and their mutual relationship.

An odd connection between growth and company value is seen. The stock price decreases as growth increases – how do this make sense? Since BIF is assumed to have a significantly lower ROIC (2,3%) than WACC (5,17%) in the continuing value period, value will be destroyed as the company grows. For every kroner of investment the company attracts, it pays out more than it earns with it.

On the other side, the relationship between ROIC and company value is more straight forward. A higher ROIC creates a higher value, which makes good sense. The company value is highly sensitive to both ROIC and growth though. This is best explained from the relationship of the continuing value formula’s components, which is defined as:

Here it’s seen, that when RONIC (which is assumed to equal ROIC of the last year in the explicit forecast period) and the growth are of the same magnitude (g/RONIC = 1), all of NOPLAT will be used for growth investments, creating a FCF of 0. When there is only little difference between growth (2%) and ROIC(2,3%), as there is in the case of BIF, then the company value becomes extremely sensitive to changes in these parameters. The consequences of this is, that even small changes in the assumptions made in the forecasting process, can lead to significant changes in stock price. Ideally the model had been less sensitive to changes in these assumptions, but they have been found reasonable relative to the results of the strategic- and financial analysis.

-1 -0,5 0,5 1

ROIC in continuing value period -100,0% -45,8% 25,4% 42,4%

Growth in NOPLAT in perpetuity 48,5% 27,5% -38,0% -93,6%

Market risk premium 7,5% 3,4% -3,4% -6,8%

Cost of debt 9,5% 4,4% -4,4% -8,1%

-10 -5 5 10

Target D/V ratio -6,4% -3,4% 3,4% 6,8%

-0,1 -0,05 0,05 0,1

Beta 6,1% 3,1% -3,1% -5,8%

Percentage points

Absolute change

Page 62 of 85 Managerial consequences

Koller, et al (2009) argues that for most businesses, the ROIC will converge towards the WACC in the long run, but cf. the Porters 5-Forces analysis it makes sense that it doesn’t in the case of BIF, since it was found that the industry in general is unattractive. A conclusion which is backed up by three leading Danish sport economists, who states that the football business is characterized by high levels of Invested Capital needed, and relative low profits.¹²⁰ Based on the assumptions of this thesis BIF is expected to have a ROIC lower than its WACC through the whole forecasted period. In the sensitivity analysis above, it was found that if the management can increase the ROIC by only 1% in the continuing value period, the stock price will increase significantly by 42,4%, everything else equal. Therefore the management is advised to take action in order to make BIF more profitable, by improving the ROIC which is defined as:

From the formula it is seen that improvements can be made in the following ways:

1. Make the present assets perform better by increasing revenues and/or reducing costs (increase NOPLAT) 2. Sell none-performing assets (decrease Invested Capital)

(1) can for instance be achieved through several different supply chain management initiatives in order to cut costs and make the organization more efficient, but especially one possibility seems obvious. In the financial analysis it was found that the stadium accounted for 70% of the total Invested Capital in 2010.

Binding this much capital cause implicit expectations about high profits generated from it. Profits BIF haven’t been able to make so far. In order to improve these, BIF could do what two competitors, Odense BK and FC Copenhagen, have done for a while with great success; Use the stadium for music concerts and events. In the strategic analysis it was found that BIF has a sustainable competitive advantage in their high end facilities – not many actors in the market can provide a frame like Brøndby Stadion.

(2) as described in the forecast chapter, the management is already acting by lowering the amount of Invested Capital by selling off expensive player who hasn’t been performing as expected. But, more drastic initiatives should be considered too. If BIF’s management doesn’t expect (1) to work, they could consider a

“sale and lease back” agreement with the municipality regarding the stadium. This would release a significant amount of capital, which could be invested in players and staff in order to improve the results sport wise, and thereby improve the chances of taking advantage of the newly emerged opportunities

120 “Advarer mod køb af fodboldaktier” – 14/04-11 – www.Finans.tv2.dk

Page 63 of 85 regarding the UEFA tournaments. Such deals have been seen in several cases in the world of football. In 2001 Real Madrid sold their training facilities to Madrid municipality in a lucrative deal worth 2 billion DKK.

Unofficially this deal was regarded a favor from the municipality, or a way of paying the club back for providing valuable PR.¹²¹ BIF and Real Madrid are two very different clubs though, but nevertheless BIF is valuable to Brøndby municipality, and a potential agreement might not be unrealistic.

In the sensitivity analysis, it is also seen that with the RONIC estimated in this thesis, value is destroyed as the club grows. If growth is decreased by 1%, BIF’s market value will increase 48,5%, everything else equal.

Therefore the club is advised to have much focus on analyzing the profitability of potential future investments, though this is a tough task in the volatile and unpredictable football industry.