Formula One Starts A New Season, But Will There Be Changes? (NASDAQ:FWONA)

Investment Thesis

It’s been half a year since we revisited the investment case of Formula One Group (NASDAQ:FWONA).

Improved financials in FH 2023 made us upgrade our stance at that time from a Sell to a Hold.

What has kept us away from investing in FWONA is twofold.

First and foremost, are the intricate inter-related company transactions. Secondly, is the absence of a dividend, which means that the only way investors can be remunerated is through a continuation of higher share price going forward.

As we all know, share prices are often determined not only by fundamentals but by sentiments.

Since Liberty bought the rights to Formula One, they have done a great job in growing the business. However, we are unsure if this growth can continue.

Financial Results

At the time of writing, the latest financial results are the Q3 results dated 3rd November 2023.

There was a good improvement in the quarter. We believe that most of this improvement came from the fact that there was one additional race that fell within Q3.

In terms of the balance sheet, we note that cash on hand as of the end of Q3 stood at $1.47 billion. Total attributable debt of FWONA was $2.90 billion.

Their leverage was 2.2 x

Formula One Group repriced its $1.7 billion Term Loan B facility in October, reducing the margin from 3% to 2.l25%. This is a convertible note due 2027. It can be converted to equity. The new conversation rate is now 12.0505 shares of FWONK per $1,000 principal amount of the respective notes. The present share price for one share of FWONK is $69.18

FWONK shares have no voting rights. FWONA shares have one vote per share.

A class of shares that have no voting rights is usually priced lower than that of the class that has the right to vote. But that is not the case with Formula One Group. We do not know why.

Therefore, the debt which now carries a principal value of $1,000 would only be worth $833.65 should it be converted at the present share price of FWONK.

FWONA will come out with their FY 2023 financial results on 28th February 2024.

Gentlemen, Start Your Engines

Preseason testing will start on the 21st of February in Bahrain, where the racing season kicks off on the 2nd of March.

The calendar this year has scheduled 24 race weekends. That is two more races than it was in last season. It was supposed to be just one additional, but last year saw a cancellation of the race in Imola in Italy, due to flooding.

Netflix’s (NFLX) television series “Drive to Survive” has been a big boost in increasing the fan base. Formula One, as a sport, was originally a sport for real motorsport enthusiasts. Now it has, unfortunately in our opinion, become more of a circus with celebrities and events like pop concerts and other unrelated activities.

The sport is still extremely competitive and fans all over the world hope for entertaining racing. Last year Max Verstappen won 18 of the races. A more closer battle of the championship would be welcome by most. It would be good for the sport and FWONA.

The Share And Its Valuation

Let us start by looking at the share price over the last year. It is up 3.5%, and probably not fair to compare it to the S&P 500 ETF (SPY).

The S&P 500 big jump was driven by the revival in share price from the “magnificent seven”. A lot of other large corporation’s share prices did not move much last year.

But coming back to our comment in the investment thesis, Liberty has no plan to pay shareholders of FWONA any dividends, so the only way shareholders might make money is an ever-increasing share price.

The share price is up 234% in eight years since its IPO. That is an average yearly increase of 29%, which is good. We just have concerns about whether FWONA can continue to grow revenue and free cash flow.

In terms of its valuation, we have used data from SA for the assessment.

Here we get the following:

Cash per share of $6.27 is pretty good. A price to forward cash of roughly 13 is decent. The P/E on a GAAP basis and TTM, however, is high at 35.9

Return on Common Equity on a TTM basis at 7.7% is average. An acceptable, but not stellar, return on equity.

There are lots of “D” grades in the valuation grade. One positive matrix is the P/Book which is stated to be 0.91

Risks To Thesis and Conclusion

Finally, to our thoughts on risks.

One risk is a slowing down in its growth. There are limits to how much Liberty can charge the fans to watch F1, and there are limits to how much the fan base can grow. Although we are fans of the sport, it is not everybody’s cup of tea.

Another risk, as we see it, is the obscure inter-related company structure. We do not think it serves the shareholders well. From our standpoint, a simpler and clearer corporate structure and a conversion to a regular C-Corporation could help.

For those who are unfamiliar with what a tracking share is, please check our first article on FWONA, which explains the characteristics of a tracking share.

Finally, a path towards FWONA regularly sharing a part of the free cash flow with all shareholders could also make us change our stance.

But for now, it is still a Hold.