Description

FWONK is set up well for 2019 with 50% upside, and given the visibility in the business, limited downside. Clark0225 has a teriffic writeup from May 2017 which I will direct you to - so instead of providing a comprehensive overview of the business, I will instead focus on the events that have transpired over the past 18 months, and why I think the stock is attractive going into 2019.

FWONK is down 16% on the year, with LYV up 14% (which represented 36% of the FWONK stock at the beginning of the year, and now represents close to half the stock price); this implies the FWONK stub is down 33% and now trades 17.5x NTM EBITDA (vs 20x to begin the year).

The lackluster performance is due to a number of reasons - continued execution issues (revenues and EBITDA likely to com in 7% and 10% below where consensus was 12 mos ago), leverage (12x 2018 EBITDA), and complexity (tracker, Liberty complex, etc.).

While the execution in the business has been slower than anticipated, expectations for a turnaround were too aggressive coming into the year; the company was still focused on filling out the corporate structure with new hires (all of which are done now), there were a few sponsors (Allianz/UBS) which had pulled out and hurt sponsorship revs, OTT was in beta for most of the year and is only set for full launch in 2019, broadcasting didn't see the anticipated step-up in this cycle since the company likely made concessions on economics in order to take digital rights in and the Miami race (which got investors bullish) ultimately ended up getting pushed to 2020 (because of some pushback from the local community).

Additionally, I believe leverage concerns are overblown; the 12x leverage, when netted against a 10% discount to FMV of its publicly traded investments, becomes 4x for a business that converts EBITDA to cash at 98% and has long-term commitments with significant visibility and should grow FCF at HSD-10% per year. They have paid down ~$300m of debt thus far this year, and will continue to use the $400m+ of FCF they generate to continue to pay down debt. ~80% of debt is fixed with no near-term maturities (until 2023).

With the team in place, integration behind us, shares re-rated and a number of catalysts over the next 24 months ahead, I believe shares for FWONK are an attractive risk/reward.

   2019/2020 roadmap

a.      Broadcasting

                                                    i.     UK deal, which has been rumored to have anywhere from a $50-$100m step-up; bulls argue greater than $100m. Street models $80m growth in broadcasting from 2018 to 2019

                                                   ii.     Renewal cycle in 2020/2021 should be more robust than the 2017/2018 cycle

1.      Company was focused on clawing back digital rights for OTT, which they largely own now; deals such as the ones in the US where they are getting no economics should provide upside in the next renewal cycle

2.      Viewership ex-Italy (which went from free to air to payTV) has grown LSD

b.      OTT

                                                    i.     After a beta year in 2018, 2019 will be the year for market deployment with potential of 1M subs

1.      Pass over 750M households globally in markets where they retain rights; WWE, which has ~1.5-1.75m paying subs, passes over 550M households

2.      Assuming 1M subs, which pay on avg ~8 months and $10/month, translates to ~$80m incremental revenues

c.      Sponsorship

                                                    i.     $40m incremental revenues in 2018 from AWS partnership and ISG (sports gambling licensing)

                                                   ii.     Potential for upside with big global sponsor (anywhere from $40-60m) to replace Allianz and UBS (which had left after Liberty had acquired the asset); lock-in from teams and Concorde getting lifted likely a catalyst for a bigger sponsorship deal

d.      Race Schedule

                                                    i.     Hanoi should add incremental economics (races in less iconic cities tend to pay ~$40-50m)

2.      Concorde Agreement should get negotiated likely sometime in 2019

a.      Concorde Agreement has served as an overhang; however, commentary from teams and league suggests an agreement should occur sometime in 2019

b.      Concorde Agreement getting settled will remove an overhang, and allow sponsors that are currently skittish on the league structure post-2020; provides an opportunity to replace a big global sponsor after Allianz and UBS had left (which can be as high as $40-60m annually per sponsor)

3.      Upside to Street 2020 estimates (with strong conversion to FCF)

a.      Bridge from 2018 to 2020

                                                    i.     2018 EBITDA estimate: $410m

1.      Incremental Revenues: $360m

a.      UK broadcasting deal: $80m

b.      OTT: $80m

c.      Sponsorship (AWS/ISG): $40m

d.      Hanoi: $40m

e.      Other (business usually has escalators growing 3-5%): $120m

2.      Incremental EBITDA (assuming 68% paid out to teams and adj EBITDA margins grow from 23% to 24%): $115m

                                                   ii.     2020 EBITDA estimate: $535m (Street at $500m); note, this does not bank on a big global sponsor coming in, which would be incremental source of upside

4.      Rationalization of LYV stake (potentially through merger with SIRI) could unlock value and create cleaner vehicle to invest in

a.      LYV stake +16% YTD; FWONK -14%. Implies F1 stub -36% YTD

5.      Valuation

a.      20x 2020 EBITDA translates to $45 stock, or 50% upside (30x 2020 FCF)

                                                    i.     MSG and WWE trade 15x 2020 EBITDA (MSG trades 25x 2020 FCF)

1.      FWONK deserves valuation premium given visibility, upcoming catalysts and strong FCF conversion

b.      Downside scenario

                                                    i.     Assuming $50m from OTT, $30m from Hanoi race, $50m from UK broadcasting deal $40m from AWS and ISG and no other major sponsorships, still get to $170m incremental revenues; additionally, $120m incremental revenues from escalators, get to $290m incremental revenues, which translates to $90m incremental EBITDA implying $500m in 2020

                                                   ii.     At 15x 2020 EBITDA (in-line with MSG and WWE), would imply $30 stock, close to where it’s trading today

c.      Maffei

                                                    i.     Acquired $300k stock in November at $30

6.      Risks

a.      Continued execution issues, including OTT

b.      UK race in Silverstone up for expiration at end of 2019; little impact to economics, but strategic venue

c.      Concorde Agreement renegotiation leads to higher shares with teams (expectations de-risked from earlier in the year, but bulls still expect improved economics to league); teams potentially leaving league (very unlikely scenario)

Catalyst

1. Concorde Agreement formalized

2. OTT launch

3. Sponsorship deals

4. 2019 earnings

5. Monetization of LYV stake