Description

Company/Industry Outlook:

Formula 1 is the pinnacle of motorsport and was founded in 1950. Liberty Media bought F1 from a consortium led by CVC Capital Partners for $4.6 billion. The sport had previously been controlled/run for a long period of time by Bernie Ecclestone.

F1’s popularity has been on the rise over the past four seasons, in no small part due to the Netflix series Drive to Survive, which is a documentary that tracks drivers and teams around the entire F1 season.

FWONK’s business model is to generate revenue from three primary sources: (1) Race promotion where a fee is paid by a promoter of a race to F1 which is negotiated on a case by case basis; (2) TV broadcast rights; and (3) Sponsorship revenue (global and regional). F1 currently has $10 billion in contracted revenue, or 4x 2022e revenue already set in stone.

There are a few legs to our investment case:

1. F1 will be promoting a race for the first time in Las Vegas. The average promotion fee for European races is ~$20 million vs. for “Flyaway” (non-European) races this is $40 million. Based on our expert calls, we believe that Las Vegas can easily hit Formula 1’s target revenue of $500 million in year 1, and generated $100 million of EBITDA, in year 1 as well. We don’t believe these numbers are in sellside models, neither do we believe that most investors (some long-term page 1 investors included) have modelled the prospects of LV to 2023 profitability.

Our estimated breakup for LVGP revenues is as follows:

Tickets @ $2k average price (based on ticket prices released) * 100k fans = ~$200mm

Bundled Deals with Casinos @ $25mm each * 5 groups = $125mm

Race specific Sponsorship revenue = $150mm (including Heineken Silver and TMobile)

Merchandise and Concessions = ~$25mm

Capex for purchasing the land and building the track will be close to $500 million, but is largely done at the F1 Corporate level, and hence the operating assets will face minimal cash flow leakage from building the track.

2. Mix of Race Promotion in 2023: 2023 has 23 races, an increase from 22 races in 2022. 2024 will have 24 races. I don't think the year and race numbers will coincide for much longer:)

In addition to the LVGP revenue benefit above, there will be at least 1 additional flyaway race, driving ~$40 million of revenue, and if Turkey is selected, there could be a further $20 million benefit form having a flyaway vs. a European race (Turkey revenue likely to be closer to $40 million vs. $20 million). Finally, Qatar has renewed its deal with F1 at a ~$10 million higher rate, while Monaco has also done so at  HSD million $ incremental rate.

3. ESPN deal: Expert calls and conversations with the sellside and IR indicate that ESPN’s broadcasting deal will drive an additional $75 million in revenue in 2023 onwards. While this is well known, it is an additional leg to the revenue/profitability mix for next year.

Based on expert calls, we don’t believe the new Sky deal will drive additional economics (outside basic CPI inflation) as the previous deal done was very lucrative.

4. Concorde Agreement: we don't believe this is being modeled well by anyone - our expert calls have provided us with a framework for how this is calculated, and it backtests accurately. Based on this, there is upside to 2023 and 2024 EBITDA numbers from the fact that less than 50% of incremental pre-team EBITDA beyond $1.75bn is paid out to teams. Add a 24th race in 2024, 

Additionally, we also believe the success of the Paddock Club (hospitality, F1 runs most events) will continue to grow, while freight revenue, typically at a small margin was generated at cost this year, and given freight rates have declined nearly 70% since their peak and are now below pre-COVID prices in some cases, should also drive additional EBITDA upside in 2023.

Valuation:

We think FWONK can generate 1,050 of EBITDA in 2025E, with ~$50mm of capex at the OpCo level, $70mm of tax, and $80mm of interest expense resutling in FCF of ~$875mm. With 248mm shares outstanding in 2025E, that translates to $3.50 in FCF/share. My assumed multiple is 30x FCF, resulting in a $105 in 18 months, or up 40% from here.

Historically, FWONK has traded at an ~32x EV/EBITDA multiple. Our 30x assumed Price/FCF multiple assumes a marketcap of $26 billion with net cash of $500 million, or an EV of $25.5 billion, which based on 2025 EBITDA of $1.05 billion, implies an EV/EBITDA multiple of 24x.

Catalyst

Vegas goes as well or better than expectations

EBITDA beat on Concorde economics being underestimated