FWONK - Formula One Group: Positive Growth Outlook Means It's A Buy

2023-06-15 02:41:21 ET

Summary

• Based on 1Q23 team payments data, I see a potential for 20% increase in adjusted OIBDA in FY23.
• Las Vegas revenues are expected to reach around $500 million, with strong demand indicated by ticket sales for the Las Vegas Grand Prix.
• I expect FWONK to continue returning capital to shareholders, with a potential to buyback as much as 10% of the market cap if it levers up to its target ratio.

Summary

Formula One Group ( FWONK ) core asset, Formula 1, continues to benefit from several tailwinds, including inflation in sports media rights, a potentially longer race calendar, and better monetization of its portfolio of assets. I believe F1 is the fastest growing global sport, and that growth is expected to drive steady EBITDA and FCF annual growth over the next few years. Based on my analysis below, assuming the same team payments per race in 1Q23 for FY23, FWONK could easily grow adj. OIBDA by 20%, which is a very healthy rate. As such, I believe that FWONK will be profitable if F1 meets its current Team Payment budget by a respectable margin and maintains its operating leverage on team payments. I reiterate my buy rating .

Adj. OIBDA outlook

I believe the team payments data revealed in 1Q23 was a favourable on for FWONK. To give context, team payments came in at $112 million in 1Q23, which equates to around $56 million per race ($112/2 race in 1Q23). If we were to extrapolate this per race metric to the entire year which is expected to have 23 races, we can back into an implied FY23 team payments total of around $1.3 billion. Using the same team payments to adj. OIBDA ration as historical average (66%), this implies around $710 million worth of adj. OIBDA. Using this quick math, it suggests that FWONK will be able to grow its adj. OIBDA by 20% vs FY22. However, the risk here is that the $56 million per race might be too conservative. Management have noted that the company has a history of being conservative when estimating annual team payments. The lack of prior experience with the Las Vegas Grand Prix sort of also forced management to be more conservative this year's. Therefore, I have my reserves that Team Payments will increase over the course of the year, which will be a headwind to my growth estimates. Nonetheless, so long as the increase in team payments per race does not increase by a ton, I still think the growth will be very healthy. For instance, if I missed the mark by 10%, say team payments per race is $61 million, this translates to adj. OIBDA of $670 million, which is still a 13% increase from FY22 levels (still better than previous levels).

Las Vegas

The situation in Las Vegas is also improving, with management having recently reaffirmed their prediction of Las Vegas revenues reaching roughly $500 million, accompanied by favorable profitability economics within the Top Five category. For context, ticket sales for FWONK have concluded for Waves 1 and 2, which is significant because it indicates that demand is strong. This is a good indication of how well the final wave of demand is like to be.

Capital allocation

As a common investment theme for Liberty family stocks, I anticipate that management will return a sizable amount of capital to shareholders via share repurchases over the next several years as a result of these improvements in business fundamentals. Therefore, I greatly applaud management's efforts to maintain a healthy balance sheet for FWONK. They were able to sustain net leverage ratio at 2.6x in 1Q23, which is much lower than the 4.5x goal set by the company. With such a low leverage ratio, the company's management has more leeway to pursue opportunities like stock buybacks and mergers and acquisitions. Of course, in the current climate, I would prefer management to repurchase shares as debt is expensive today. If we do the math today using the 4.5x target leverage ratio on my estimated FY23 adj. OIBDA, FWONK can easily raise $1.8 billion in cash, which is about 10% of current market cap.

Valuation

FWONK valuation does not shout expensive either, relative to its trading history. FWONK typically trades in the range of 23x to 32x forward EBITDA and an average of 28x EBITDA. Today, it is trading at 25x forward EBITDA, the lower end of the range. I believe the weakness in the stock is largely due to the ambiguity on how reliable the 1Q23 team payments per race is (which investors use to estimate FY23 adj. OIBDA). As the year unfolds, if that figure maintains as per 1Q, I think it will be a catalyst to drive the stock and valuation upwards as investors become more certain on the FY23 adj. OIBDA outlook.

Risks

The major risk here is the cancellation of races or another round of “forced cancellations” like Covid. If we look at the earnings equation for the business, the number of races is something that is somewhat fixed, and investors believe there will not be any changes. Suppose a lockdown happens again, it would wipe out a large chunk of FWONK earnings and the stock will dive. During covid, the stock dived from the high $40s to as low as $18.

Conclusion

I reiterate my buy rating for FWONK stock as the favorable team payments data from 1Q23 suggests a healthy growth rate for FWONK's adjusted OIBDA. Although there is a risk of conservative estimates and potential headwinds in team payments, even a slight increase would still result in strong growth. Additionally, the situation in Las Vegas is improving, indicating strong demand and positive revenue projections. Management's efforts to maintain a healthy balance sheet and potential share repurchases demonstrate their commitment to maximizing shareholder value.

For further details see: