William Grand Prix — Challenges on the track

William Grand Prix — Challenges on the track

H119 results inevitably reflected Williams’ weak finishing position in the Formula One (F1) Constructors’ Championship in 2018. The resultant lower income for the racing team significantly outweighed a continued strong performance by Williams Advanced Engineering (WAE). Unfortunately, the competitive situation has not improved in the current season and a further weak year for the F1 business is anticipated in 2020. The extension of the multi-year sponsor partnership with ROKiT to 2023 is encouraging and should hopefully dovetail with a more equitable distribution from F1.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Williams Grand Prix

Challenges on the track

Industrials

Scale research report - Update

23 September 2019

Price

€13

Market cap

€130m

Share price graph

Share details

Code

WGF1

Listing

Deutsche Börse Scale

Shares in issue

10.0m

Net debt at 31 December 2018

£11.9m

Business description

The group comprises a Formula One (F1) racing team (76% FY18 revenues) and Williams Advanced Engineering (WAE; 24% revenues). The F1 racing team placed 10th in the 2018 FIA F1 Constructors’ Championship. WAE specialises in the commercial application of aerodynamics, materials and battery technologies.

Bull

Liberty Media’s ownership of F1 Group should lead to higher publicity for the sport and therefore higher prize funds.

WAE continues to grow with a high-end product offering, creating a positive track record.

The potential for a more equitable distribution of commercial rights in F1 in the near future should benefit teams such as Williams.

Bear

Continued underperformance on track adversely affects profitability and cash flows.

No improvement in current year F1 Championship position is expected.

Requirement to maintain investment in F1 racing team to improve competitiveness.

Analyst

Andrew Chambers

+44 (0) 20 3077 5700

H119 results inevitably reflected Williams’ weak finishing position in the Formula One (F1) Constructors’ Championship in 2018. The resultant lower income for the racing team significantly outweighed a continued strong performance by Williams Advanced Engineering (WAE). Unfortunately, the competitive situation has not improved in the current season and a further weak year for the F1 business is anticipated in 2020. The extension of the multi-year sponsor partnership with ROKiT to 2023 is encouraging and should hopefully dovetail with a more equitable distribution from F1.

H119 results

H119 group revenues fell 6% to £77.8m (H117 £82.6m), reflecting the divergent progress for the two main operating businesses. WAE revenues grew 44% while F1 segment (F1) revenues were adversely affected by reduced FY18 season performance payments and lower sponsorship income. The group’s EBITDA loss expanded to £18.8m (H118 loss £2.7m) as the lower F1 segment revenues failed to be matched by reduced operating costs. WAE continued to deliver an improved EBITDA although timing limited the growth compared to the sharp rise in sales. The group reported an H119 loss per share of 216.0p (H118 87.2p loss).

Investing to improve racing performance

The major challenge for the group is likely to be maintaining funding levels during the current period of reduced returns due to weaker racing performance. Cash and cash equivalents were negative at the end of H119, reflecting the use of overdrafts. The statement indicates that other sources of funds may mitigate future funding requirements including further land disposals and heritage asset sales. As announced on 2 September 2019, Williams is in an early stage of exploring options for WAE to accelerate its growth and commercialisation opportunities.

Valuation: Challenges to persist

The weaker trading in H119 reinforces our view that earnings and revenue for the group remain volatile as the profit performance of the F1 segment continues to dominate. The options for WAE could include a partial equity sale, which could value a core element of the group but realistically such a move would have little effect on the group’s overall rating as it remains unclear what value should be given to the cash outflows from F1. Current race results suggest little improvement in FY20 financial performance from F1, although adding sponsors may help. We are moving towards the hoped-for level playing field in the sport, which could lead to more competitive performance and better, more consistent financial returns.

Historical financials

Year
end

Revenue
(£m)

PBT

(£m)

EPS

(p)

DPS
(p)

P/E

(x)

Yield
(%)

12/15

125.6

(11.2)

(116.2)

0.0

n.m.

0.0

12/16

167.4

5.9

59.5

0.0

19.3

0.0

12/17

166.2

14.1

141.8

0.0

8.1

0.0

12/18

176.5

3.4

34.0

0.0

33.8

0.0

Source: Company reports

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

H119 results review

Having finished last in the 2018 F1 Constructors’ Championship, trading performance in the current year was always going to prove challenging, especially for the F1 racing activities, and group revenues fell 6% to £77.8m (H118 £82.6m). F1 segment revenues fell by 24% or £14.4m to £46.3m (H118 £60.7m), reflecting lower performance payments from the championship result as well as reduced sponsorship income. The decline in F1 income more than offset what was an extremely strong revenue performance by WAE where revenues increased by 44% or £9.5m to £31.0m (H118 £21.5m) as the business continued to diversify its project base.

Gross margin fell to 48.6% (H118 52.0%), reflecting the weaker F1 revenues that were not matched by a commensurate fall in cost of sales despite the lower revenues, as a result of the need to continue investment to improve current and future racing performance.

Exhibit 1: Williams Grand Prix Holdings interim results summary

Income statement

12 months to December

H118

H218

FY18

H119

H1 change

Revenue

F1 revenue

60.7

70.0

130.7

46.3

-23.8%

WAE revenue

21.5

23.3

44.8

31.0

44.2%

Other

0.5

0.5

1.0

0.5

16.1%

Group total

82.6

93.9

176.5

77.8

-5.9%

Gross profit

43.0

62.4

105.4

37.8

-12.0%

Gross margin

52.0%

66.5%

59.7%

48.6%

-6.5%

Other operating costs

49.5

51.6

101.1

61.1

23.5%

Other operating income

3.9

4.8

8.7

4.6

18.1%

F1

0.2

15.8

16.0

-16.8

n.m.

WAE

2.3

2.9

5.1

2.5

9.2%

Other

-5.1

-3.1

-8.2

-4.4

-12.0%

EBITDA

-2.7

15.6

12.9

-18.8

607.7%

Depreciation

-2.8

-2.9

-5.7

-2.7

-5.0%

Amortisation

-0.5

-0.6

-1.1

-0.6

30.4%

EBIT

-6.0

12.1

6.1

-22.1

270.5%

Share based payments

-0.4

-0.9

-1.4

1.3

-402.5%

Movement in derivative financial instruments

-1.3

0.8

-0.6

0.2

-117.4%

Other non operating costs

-0.4

0.4

0.0

Net interest

-0.3

-0.4

-0.7

-0.4

6.7%

Profit Before Tax (as reported)

-8.4

11.8

3.4

-20.9

147.9%

Net Income (as reported)

-8.4

11.8

3.4

-20.9

147.9%

EPS (as reported) (p)

-87.2

121.2

34.0

-216.0

147.7%

Source: Company reports

Other operating income in the F1 business was broadly unchanged at £3.2m from £3.1m in H118, with modest increases at WAE and the ‘Other’ category. Operating costs excluding depreciation and amortisation actually rose £11.6m to £61.1m although around £8m of the overall cost increase looks to have been due to timing of projects at WAE. Nevertheless, the EBITDA performance at F1 deteriorated sharply by £17.0m to a £16.8m loss (H118 EBITDA profit of £0.2m). WAE’s EBITDA rose modestly to £2.5m from £2.3m in H118 and there was a reduced EBITDA loss of £4.4m (H118 EBITDA loss £5.1m) generated by the ‘Other’ category. Overall in H119 the group generated an EBITDA loss of £18.8m compared to an EBITDA loss of £2.7m in H118.

The company does not disclose net debt, but net cash and cash equivalents fell by £11.8m to a negative £2.3m in H119 (H118 positive net balance of £2.2m) reflecting the use of overdraft facilities and compared to a positive net cash and cash equivalents balance of £9.5m at the start of FY19. Net assets fell to £28.8m from £51.0m at the start of the year, largely reflecting the net loss in H119.

Outlook

Management indicated it believes the bulk of the EBITDA deterioration for FY19 had occurred in H119, which would imply a much improved H219 outturn. A good deal of the improvement Is likely to come from WAE where the increasing revenues seem likely to be accompanied by a much-improved full-year margin improvement, reflecting the timing of risk retirement and profit recognition on projects. Whether this is sufficient to compensate for still challenging trading conditions for the F1 segment remains to be seen, as the company clearly needs to keep investing in FY20 race performance improvements. However, given that FY20 performance receipts relate to the current season’s performance in the F1 Constructors’ Championship, we do not expect any substantial improvement in FY20 revenues, although finding additional sponsorship could help. We would hope for an improved race performance in the 2020 season leading to a better revenue level for the F1 segment in 2021.

WAE continues to grow and develop new IP-driven activities such as the potential opportunities in electrical vehicles and battery technology. If these factors are combined with a more equitable future F1 commercial proposition arising from the control of Liberty Media, then prospects for a more sustainable and potentially less volatile level of profitability and cash flow could become more of a reality for the smaller independent racing teams such as Williams. However, it is still unclear whether the ambition to grow the prize pot as a result of increased global reach is being achieved. Clearly, dividing a larger total prize fund more equitably would likely not attract much resistance from the more affluent teams if their individual net prize revenues are not negatively affected, as opposed to getting a larger share of a smaller total fund.


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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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