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Morningstar | Formula One Beats 1Q Expectations; We Remain Skeptical About 2020 Race Schedule. See Updated Analyst Note from 09 May 2019

Formula One Group started off 2019 on a strong note as revenue and adjusted EBITDA both beat consensus and our expectations for the first quarter. Management provided an update on the 2020 season which previously was missing five 2019 races. F1 now expects to have 21 races on the schedule for 2020, in line with 2019. We have updated our model to include the expected return to the Netherlands, increasing our projected 2020 race schedule to 20 races. As a result, we are raising our fair value estimate to $31 from $29. We are maintaining our narrow moat rating.

Revenue for the F1 Group improved by 116% year over year to $246 million as the firm held two races in the first quarter this year versus one a year ago. Both were flyaway races (Australia and Bahrain) which helped drive primary F1 revenue up 133% to $198 million, well ahead of our $183 million estimate. Due to the additional race, team payments expanded by 113% to $96 million and other cost of revenue jumped 44% to $52 million, resulting a gross margin of 40%, substantially ahead of the 29% margin a year ago. Adjusted EBITDA grew to $65 million from $3 million in the first quarter of 2018. As a result, adjusted EBITDA margin hit 26% versus 3% a year ago. Investors should note that the 2019 F1 race schedule has 21 races with two thirds (14) of races occurring in the second and third quarter. Given the timing of revenue and expenses, we don’t believe that the adjusted EBITDA margin expansion in the first quarter is sustainable and we project that the 2019 full-year margin will expand, albeit slower than in the first quarter, to 23% from 21% in 2018.

With the previously announced addition of Vietnam, the expected return of the Dutch Grand Prix, and the probable five-year renewal of Monza in Italy, the firm’s expected schedule of 21 races in 2020 means that management expects to renew two races out of Mexico, Silverstone (Britain), Germany, and Barcelona. We believe that the firm will most likely renew with Silverstone given the historic roots within the U.K. for Formula 1 racing even if the relatively low hosting fee will need to be further cut. However, we continue to believe that Mexico remains a longshot to renew given the federal government’s decision to reallocate its significant portion of the hosting fee to public transport efforts. Additionally, the promoters of the Mexican GP have already missed F1’s initial March deadline for 2020 preferred calendar rights.

The Spanish GP will likely be replaced on the race calendar by the Dutch GP at Zandvoort, meaning F1 and the Spanish race promoters will need to negotiate not only the hosting fee but also an appropriate spot on the calendar. Like in case of the Mexican GP, the government has pulled its financial support for the race, making a renewal unlikely in our opinion. The German GP appears dead in the water as the 2019 race was a late addition to the calendar and there has been no public discussion about the race in the recent months. As a result, we remain skeptical about the race schedule containing 21 races in 2020.