A review of Rangers International Football Club accounts for year ended 30 June 2018.

Ironically, it was only yesterday afternoon that I was discussing the non-appearance of the RIFC accounts with Rugger Guy.

He said the clock was ticking on that matter if the board wanted to have an AGM this year.

Then during the match against Kilmarnock last night they were released!

You can read them here.

As ever, I’m hugely grateful to my egg chasing buddy for drilling into the detail for me on these accounts.

Here is what he sent me today:

 

 

A review of Rangers International Football Club “RIFC” for year ended 30 June 2018.

Phil, you have asked me to do a review of the accounts of RIFC and I have to say that there are many points to cover, almost all point to a very difficult financial outlook for the football club.

The accounts were signed off by the auditors and the directors on 17 October but were not released until 31 October. This seems strange and interestingly in this period, the football club lost a court case with regard to Sports Direct in which further costs and damages will flow. Clearly, this outcome is not discussed in the RIFC accounts, but the costs could be substantial.

 

To try and cover the most important points, I will deal with the results in some logical order.

 

1. Putting the results in some context.

 

2.     Auditors report and change in emphasis.

 

3.      Post Balance sheet events.

 

4.     Contingencies.

 

5. A review of trading

 

6. A review of cash flow.

 

7. A review of the balance sheet.

 

8. Where does RIFC go from here?

 

 

Putting the results in some context.

 

The results for the year show,

Total revenue at £32.7m vs £29.3m

Operating expenses £46.3m vs £32.9m

Loss for the year £14.3m vs £6.7m

Net current liabilities

(Working capital) £-16.4m vs £-6.8m.

 

In a nutshell, the financial performance has worsened significantly, and since RIFC was formed in 2012, the cumulative retained losses are approaching £39m in this six-year period. This is not sustainable.

 

Auditors report and change in emphasis.

 

Once again the accounts have been qualified, however, in last year’s accounts, the auditors referred to an “emphasis of matter” regarding a going concern. It should be stressed that the recent share issue yielded only £1.5m in cash injection to RIFC. The balance of £11.1m was a conversion from debt to equity. This year the auditors referred to as “material uncertainty relating to going concern”. In order to continue trading in the next twelve months, £7.6m is required of which £4.6m is needed in season 2018/19. The auditors emphasise the material uncertainty of certain key variables, including the achievement of football performance and player trading. Should certain inputs to the cash flow not be achieved as forecast the projected shortfall could be materially higher than £7.6m. The financial statements produced do not include adjustments if these estimates are not met. In my opinion, this does not bode well.

 

Post Balance sheet events.

 

RIFC has committed £1.2m capex on the stadium and training facilities. RIFC acquired 4 permanent and 4 players on loan for a cost of £6.2m. Three players were sold, 2 on loan and sell on fees of players previously sold will yield £3.9m. As mentioned above the share issue which was due to produce £12.6, resulted in a cash injection of £1.5m, the remaining balance of £11.1m was for investors debt to be converted to equity, hence the need for fresh finance within the next two months. Since the year end, the investors/ directors have provided additional further loans of £2m. The outstanding issues with Sports Direct are not mentioned in detail and as I mentioned, the account was signed off before the recent court rulings, so there is no reference to the further legal costs and damages that may follow. These could be substantial.

 

Contingencies.

 

So far RIFC has paid legal costs of Sports Direct of £125k. There is no quantification of what the other costs may be. Rafat Rivzi is suing for £208k in respect of services provided. This court case will be held in early 2019. The allegations from Craig Whyte are ongoing. As the takeover panel dispute is deemed to be a matter between the chairman and not involving RIFC there is no comment on this. However, should financial cold shouldering be imposed, then potentially RIFC will suffer some serious consequences in the event that Mr King retains his association with RIFC.

 

A review of Trading.

 

Revenues were £32.7m of which the gate receipts were £23m.

Season tickets sold were 44.5k vs 43.3k last year and average ticket prices increased by 4.5% to £328. Average attendance was 49.2k vs 48.9k the previous year, so pretty much full to capacity.

Sponsorship was £1.9m, broadcasting £3.7m Commercial £600k, UEFA prize money £650k and other revenues which includes retail and catering provided £2.8m.

From a revenue perspective, RIFC needs substantial income from European matches and player trading to get closer to breaking even otherwise they have virtually no chance of breaking even on the existing infrastructure base. I suspect that Retail revenues are unlikely to provide a substantial boost.

 

Operating expenses have increased by 40% in the year to £46.3m . Staff costs increased by £6.5m to £24.1m and player costs alone are almost £5m higher this year at £15.1m. What needs to be highlighted also is that since Mr Gerrard was appointed as manager, 15 new players have been brought in to the football club, and also he has a substantial backroom staff, which, given the emphasis placed on increasing the quality of personnel, implies that these staff costs will increase even more substantially in the 2019 accounts. Given the changes in management of the year and substantial reshuffling of the playing squad, this has resulted in amortisation and write off of player registration costs of £7.4m against £1.6m in the previous year. This alone is a very significant factor behind the poor financial performance. Other operating charges which includes match day costs including police, stewarding and pitch costs increased by 10% in the year to £13m.

 

A review of cash flow

 

A lot of people pay close attention to the underlying cash flow as a better indicator of the true state of the business. Operating cash outflows were £4m vs £1.9m last year. Cash outflows from investing activities including players were £4.5m vs £3.9m. So in total an outflow of £8.5m. The aggregate outflow has once again been balanced by a further loan receipt of £7.6m in the year and was £6m in the previous year. Note also that £2m has also been provided since the year-end, and the auditors are highlighting with major caveats that a further £7.2m is needed to continue trading in the next 12 months.

 

A review of the balance sheet.

 

The key area to focus here is on loans and working capital in order to assess the challenges for RIFC. Also worth reviewing is intangible assets which represents the value of players and the brand.

The working capital of RIFC (current assets less current liabilities) shows a deficit of £16.4m. The deficit was £6.8m last year. In layman terms, this represents what needs to be paid versus what is coming in for the next 12 months. Most companies tend to aim for a surplus here.

In addition, RIFC has loans outstanding of £23.4m at 30 June 2018, although £11.1m was converted to equity in the recent share issue. The balance of £23.4 m was made up as NOAL (Mr King £8.5m). Directors loans £5.1m and Other related party loans of £9.9m.This outstanding loan balance was £15.9m last year. Regarding security on loans, the only secured debt noted in the accounts is for the Hummel training centre. There is no specific reference in the accounts regarding the loan provided by Close Bros. I thought this was provided during the year and repaid after the year-end. There is no reference in post balance sheet events nor is there any reference to secured assets. Total contracted liabilities have increased from £26.9m to £38.7m, but I am surprised that Close bros loan details have no accompanying commentary. RIFC are required to pay £7.3m for players within 12 months and £5.3m in more than 12 months.

On Intangible assets, the book value is currently £27m vs £25m last year. Within this asset category, the Rangers brand is worth £16m according to the directors. Player book value is £11m.

Technically, if players were sold tomorrow at book value RIFC could not repay its indebtedness.

 

 

Where does RIFC go from here?

 

I appreciate that there is a lot of detail contained in the information provided so far.

I could have delved into more detail but feel that most of the salient and material issues have been highlighted.

In a nutshell, more money needs to be provided to remain in business. The directors and auditors have signed off in a £7.2m requirement over the next 12 months. However, there is a material emphasis on player trading and football performance. In my opinion, the only real scope for substantial revenue uplift is to sell players or generate large sums from European success.

The shadow of further litigation looms over RIFC and I would not underestimate the possibility of collateral damage from the Takeover Panel. Mr Gerrard has bought in 15 players and a large backroom staff so it is quite possible that staff costs will balloon even more. The directors and investors have converted £11.1 m debt into equity, but RIFC still owes £14m post this event and a further £7.2m is required. The book value of players is only £11m, and the working capital deficit alone is over £16m. A further £5.3m in respect of player costs due to be paid in more than one year highlight the ongoing liabilities of RIFC. The directors have signed off on providing the necessary finance with NOAL reiterating that it will provide finance. The same as last year. Groundhog Day?

 

Ok, that looks like a car crash to me and pity the poor stenographer who was to put a positive spin on those accounts.

Have a great day!