Racing in the UK is going through a period of significant change, following attacks on various fronts. The Office of Fair Trading (OFT) has criticised the Sport of Kings for being uncompetitive and too cosy for existing operators. And the Government, in conjunction with racing’s regulatory authorities, wants to reform the way the sport is funded by bookmakers, via the Levy Board.

These uncertainties were exacerbated when the major provider of racing television coverage to betting shops and other subscribers collapsed last year forcing racecourse owners to re-negotiate the media agreements to cover their races, at lower up-front prices, with the successor organisation. And all this has happened over the past year amidst allegations of attempted race fixing by some of the leading jockeys.

However, change also brings opportunities, particularly for the leading participants in the industry. Between them the three major racecourse owners – Racecourse Holdings Trust, Northern Racing and Arena Leisure – operate 29 of the 59 courses in the country, owning 13, nine and seven respectively.

Many of the smaller racecourses will find it increasingly hard to make ends meet in an area that is being forced to become more competitive by the authorities. The larger operators will be best placed to step in and take advantage of the current situation that leaves their smaller brethren vulnerable. With their greater financial resources and professional management, they will be able to hold more fixtures and snap up smaller players.

At the same time racing is also experiencing a period of renewed popularity. Innovations such as all-weather tracks, floodlit racing, Sunday fixtures and moving major events such as the Derby to Saturdays, are all helping revenues rise across the industry. Betting is becoming increasingly acceptable – bets worth £9 billion were placed last year on the horses by UK punters – and corporate hospitality income is improving.

However, as well as enjoying rising levels of income from diverse sources, these outfits are sitting on substantial assets. These can be used on non-race days for other events. Local authorities, keen to develop brown-field sites, are beginning to look more favourably on development plans for these under-utilised areas. On this basis Northern, which is backed by the Clarke family and property developer St Modwen, looks distinctly undervalued.

Strategy

Northern Racing grew out of property entrepreneur Sir Stanley Clarke’s passion for racing. He bought his own local racecourse, Uttoxeter, in 1988 and then acquired seven other courses: Newcastle, Sedgefield, Hereford, Yarmouth, Bath, Brighton and Fontwell Park. Last year, he reversed this collection into Chepstow Racecourse, which was already listed on AIM, making it the second biggest owner of racecourses in the UK, with 1,800 acres in all.

However, the third largest operator, Arena, uses its seven courses more regularly, holding far more fixtures – 315 in all during 2004 against Northern’s 196. This is because three of Arena’s courses have all-weather tracks.

Northern’s aim is therefore to maximise the income from its courses, by holding more fixtures and exploiting other revenue streams. At present, races are held on just six per cent of the available days. This gives substantial room to grow this aspect of the business.

The process has already begun. In 2004 turnover from events and hiring out venues rose 19.4 per cent on a like-for-like basis. Fontwell Park, for instance, held an ‘ABBA’ night.

The group, founded by racing enthusiasts and built up in that way, is in no danger of neglecting its core proposition of running successful racedays. This still accounts for 80 per cent of turnover. Average raceday profit last year rose 16.2 per cent, again on a like for like basis.

While Northern’s racecourses are essentially founded on strong local support, being a nationally spread group allows the company to negotiate supply agreements efficiently on a central basis. For instance, John Smith’s and Fosters supply drinks; Totesport provides on-course betting shops: and a variety of companies, including Harry Ramsdens, deliver catering contracts. All agree to help promote racedays for Northern as well.

Northern’s national reach also allows the group to attract major sponsors for its races. 90 per cent are sponsored, against an industry average of 25 per cent. With a reputation for running successful local racedays, the company manages to obtain an average of 65 per cent of its income ahead of each meeting, through pre-selling admissions, hospitality, advertising and sponsorship.

One major drawback over the past year has been the collapse of the agreement with Attheraces to sell rights to broadcast races, agreed collectively between all racecourse owners, for a sum. Revenues from this source will fall from five per cent to just one per cent of turnover this year. In addition Northern has become a shareholder of the new channel and will have to meet some of the expenses involved in televising races, such as the telecom link.

The new racing arrangements, forcing operators to bid for fixtures, has aided Northern, which has increased the number of fixtures held by a net seven to 203 in 2006. Major rises in revenue will come from letting out the existing buildings for conferences, exhibitions, weddings and other similar items. Longer-term prospects for greatly enhancing these income streams will come from developing these sites, which in turn will boost value.

Management

Northern Racing is run by a team that understands their customers well and which is equally focused on expanding the sport’s appeal and obtaining extra income from related sources. This is achieved by having a central management able to deal with national supply agreements and drawn-out negotiations with regulatory bodies, complemented by strong local managers of each racecourse in tune with their core supporters.

This culture of divesting power to managers with local expertise while maintaining central support was inculcated by the group’s founder Sir Stanley Clarke. His death last September left a considerable hole in the company, even though he had relinquished his board position by then.

However, his son Simon, who speaks for the majority Clarke family holding, seems to be taking a similar approach. Before becoming deputy chairman, he was manager of Brighton racecourse, exploiting its potential and expanding commercial income considerably.

Chairman Graham Stow was formerly chief executive of Britannia Building Society, a major supporter of meetings at Uttoxeter. He is, in addition, a non-executive director of the Co-operative Bank and the Department for Work & Pensions.

Managing director Rod Street has been with the group for over ten years, starting at Uttoxeter, before moving to Bath and Brighton. He has been in his present role since 2001.

Tony Kelly joined the group as finance director last August from listed hotel group Hanover International. This appointment shows the direction in which Northern wishes to move and his experience will prove valuable in developing the assets.

Prospects

At the moment, the tangible assets on Northern’s balance sheet are valued at £73 million. Newcastle makes up a quarter of this value, Uttoxeter accounts for a fifth and Chepstow an eighth, with the remaining six courses accorded relatively smaller amounts.

House broker Panmure Gordon believes there is ‘significant potential’ for alternative use of parts of these sites such as for hotels, casinos, housing or commercial tenants. As an example, the Newcastle course could be used for a number of leisure pursuits, including five-a-side football and a casino, while Chepstow might have room for a hotel and some residential development. Many of the courses are located close to town or city centres.

The group has underlying expertise in property development, with St Modwen holding a significant stake in the company. Northern has also renegotiated its current debts of £27.4 million to a very favourable rate of one per cent above base rates (LIBOR). The facility allows borrowing to rise to £32 million. In conclusion Panmure Gordon reckons the assets could be valued at £20 million higher, given their potential alternative uses.
The group’s healthy financial outlook also puts it in an excellent position to acquire other courses.

That said, there are some risks that investors should be aware of. The racing industry is undeniably in flux. The arrangements about how bookmaking revenue should support racing is unclear. Latest indications are that the present system of the Levy Board essentially funding prize money at race meetings looks likely to continue for at least three years.

The other risk, which is harder to change, is the weather. Last year 11 fixtures were abandoned. Panmure Gordon has factored this into its forecast, including a provision of £400,000 annually. Northern has been planning to create an all-weather track at Sedgefield, which would emulate Arena’s facilities. This has been put on hold for this season so as not to interfere with the scheduled turf meetings. Income will consequently not grow as much as envisaged this year but costs will be saved.

Valuation

Looking at the operational business alone, Northern does not look cheap. Turnover is only forecast to grow marginally above inflation as the gains made in non-raceday income are pulled back by lower revenue from media right sales to Attheraces and ultimately the bookmakers. However, pre-tax profits should grow at a faster rate, because the non-raceday income has a high margin as it merely involves hiring out the facilities.

At the moment the group has a net asset value (NAV) of £41.4 million, or 120p a share. This is below its share price of 157.5p, giving a market value of £55.5 million. In comparison Arena Leisure’s seven courses have a net asset value of £56.1 million against a market value of £142.8 million.

If Northern’s NAV could be boosted by £20 million as suggested by Panmure Gordon, then the shares would be worth 178p. Add in the extra revenues and profits that developing these assets would bring and the broker believes the shares should rise above 200p.

If additional racecourses are bought at distressed prices then this could only boost the price further. Buy.

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Northern Racing: thoroughbred assets			03/08/2005
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