Good morning! 5-a-side soccer centre operator, Goals Soccer Centres (LON:GOAL) has announced a trading update for the year ended 31 Dec 2013. They have 43 soccer centres in the UK, and 1 in the USA. The company says that trading was in line with expectations. Sales rose 3% to £33.5m, with LFL sales up 2% (i.e. stripping out the impact of new sites and any closed sites).

Bank debt has fallen from £54m at 30 Jun 2012 to £46m at 31 Dec 2013, although that is still prohibitively high for my liking. They had to put new site openings on hold whilst the debt was reduced, although the company is now talking about resuming growth - how is it going to fund that though? A Placing looks likely in my opinion, and would be a good thing, to strengthen the Balance Sheet by reducing debt.

It's a good, cash generative business, but has too much debt in my view. Also the shares have had a very good run recently, and are now almost 200p, valuing the company at about £100m, with debt being almost half as much again.

Broker consensus is for 14.4p EPS for 2013 (which they have today confirmed they are in line with), and 15.4p next year. That puts the company on a PER of 13.7 for 2013 earnings, and 12.8 times 2014 earnings. That would be fine if the company was debt-free, but it isn't. The debt of £46m equates to about 87p per share, which in simple terms takes the PER up to nearer 20. If valuing it on a debt-free basis, you would have to adjust earnings to strip out interest cost, which would increase EPS by roughly 25%. So making that adjustment the debt-free PER would be about 15.8 (EV of 284p, divided by forecast EPS * 1.25 = 18p), so not cheap considering there hasn't been any significant growth for a while (see graphical history below);

The dividend yield is only 1%, and in my view they would be better off not paying dividends until the business has reduced its debt to more sensible levels. The market seems to have priced in growth from new sites, but to my mind the price is now high enough, and the shares are too risky for me. That said,…

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