Scale research report - Initiation Industrials Williams Grand Prix Holdings 26 June 2017 Price €18.2 The need for speed Market cap €182m Share price graph Williams Grand Prix Holdings is a unique investment proposition. It allows ownership of a Formula One team alongside a high tech consultancy business. Management’s priorities are to challenge for race wins and grow a profitable advanced engineering business, but the potential for shareholder return is currently limited. The new owners of Formula One Group, Liberty Media, seem intent on changing the structure of the industry which could open up opportunities for longer-term value creation. Track performance is vital Share details Williams’ financial performance is inextricably linked to its position on the track. Its Code WGF1 two main sources of income; commercial rights (participation and prize money Listing Deutsche Börse Scale received from Formula One Group) and partnership income (sponsorship), are both Shares in issue 10m higher when the team is doing well. Success breeds success. Thus, the group’s Last reported net debt as at 31 €36.1m focus is on developing racing cars that compete at the front of the grid. There are December 2016 no caps on the amount Formula One teams can spend and Williams’ main competitors, Ferrari, Red Bull and Mercedes are thought to spend up to three times Business description as much. While Williams Advanced Engineering (WAE) is a profitable and growing The group comprises a Formula One racing team business in its own right, it currently helps to finance the Formula One team. (70% revenues) and Williams Advanced Engineering (WAE) (22% revenues). The Formula One racing The start of a new era in Formula One team placed fifth in the 2016 FIA Formula One Constructors’ Championship. WAE specialises in the Liberty Media recently bought Formula One Group, the company responsible for commercial application of aerodynamics, materials the promotion of the Formula One World Championships and the sport’s and battery technologies. commercial rights. The deal represented the end of Bernie Ecclestone’s stranglehold on Formula One and heralds the start of a new era. Liberty Media has Bull stated its desire to grow Formula’s One’s core revenue streams as well as access Liberty Media’s ownership of Formula One Group should lead to higher publicity for the untapped potential in digital media. Whereas the previous owners saw social media sport and therefore higher prize funds. as a threat, Liberty Media sees it as an opportunity. Higher revenues at Liberty Williams Advanced Engineering is a growing business with a high end product offering. Media mean a higher prize fund for the teams. Liberty is also considering ways to If spending caps are introduced it will be to the make the sport more competitive, which are thought to include introducing benefit of smaller teams such as Williams. spending caps. This would benefit Williams and other smaller teams. Bear The management is focused on track A unique value proposition performance over shareholder return. Financial performance is heavily dependent on As the only publicly listed Formula One team in the world, it has no peers. The track performance which is unpredictable. Higher profits at WAE are likely to be reinvested Formula One operation is cash consumptive and therefore its value is in the brand, into the Formula One business. which is highly subjective. WAE could be valued as an engineering consultancy Analyst business but this would require a change in the group’s capital allocation policy. Andy Chambers +44 (0)20 3681 2525 Historic financials [email protected] Year Revenue* PBT* EPS DPS P/E Yield Edison Investment Research provides end (£m) (£m) (p) (p) (x) (%) qualitative research coverage on companies 12/13 130.4 11.7 123.9 0.0 13.1 N/A in the Deutsche Börse Scale segment in 12/14 90.2 (34.5) (391.2) 0.0 N/A N/A accordance with section 36 subsection 3 of 12/15 125.6 (11.2) (116.2) 0.0 N/A N/A the General Terms and Conditions of Deutsche Börse AG for the Regulated 12/16 167.4 5.9 59.5 0.0 26.9 N/A Unofficial Market (Freiverkehr) on Source: Williams Grand Prix Holdings. Note: *Revenue & PBT for continuing operations. 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. The first and only publicly listed Formula One team Sir Frank Williams first entered a car in the Formula One Championship in 1969. In 1977 he co- founded Williams with Sir Patrick Head. Since then, the team has won nine Constructors’ Championships and seven Drivers’ Championships, making it the third most successful team in history after Ferrari and McLaren. It listed on the German Stock Exchange in March 2011, raising approximately €60m for selling shareholders and becoming the first publicly owned Formula One team. It opted to list in Germany to avoid regulations in London that would have required the disclosure of key sources of income, in particular amounts from its principal sponsors. Sir Patrick stepped down from the board in December 2011 and remained a part-time employee until his retirement in 2015. Sir Frank Williams has retains a controlling 51.3% stake in the company. The company’s strategic objective is to build a championship winning Formula One team alongside a robust and profitable advanced engineering business. Exhibit 1: Revenue by division Other 8% WAE 22% Formula One revenue 70% Source: Williams Grand Prix Holdings 2016 annual report Exhibit 2: Revenue by division (LHS) and group PBT margin (RHS) 180,000 20.0% 160,000 10.0% 140,000 0.0% 120,000 100,000 -10.0% 80,000 -20.0% 60,000 Revenue (£000_ Revenue -30.0% 40,000 20,000 -40.0% - -50.0% 2012 2013 2014 2015 2016 Formula One revenue WAE Other Group PBT margin (RHS %) Source: Williams Grand Prix Holdings 2016 annual report Williams Grand Prix Holdings consists of two separate legal entities: Williams Grand Prix Engineering, which operates the Williams Formula One team (currently branded Williams Martini Racing), and Williams Advanced Engineering (WAE). The group exists because of the Formula One team, and the Formula One team’s raison d’être is to win motor races. This leads to a business strategy where the primary capital allocation for the group is reinvestment in the business in pursuit of performance improvements. However, as the only publicly listed Formula One team, Williams is frequently faced with the difficult choice of balancing continued technical development with financial prudence; whereas several competitors benefit from higher budgets. The £14m of other income in 2016 mostly relates to a one off project delivered across the Formula One and WAE business units for an undisclosed customer. It is not expected to recur. Williams Grand Prix Holdings | 26 June 2017 2 Williams Formula One Williams Martini Racing competes in the Formula One World Championship, an annual nine-month long motor race based competition in which teams compete for the Constructors’ Championship and drivers compete for the Drivers’ Championship. It has two main sources of revenue: commercial rights income and partnership income. Commercial rights income This is the money received from Formula One (now part of Liberty Media Corporation) under the ‘Current Concorde Arrangements’. The prize fund paid to teams is a percentage of Formula One Group’s EBITDA (65% in FY15, equating to $876m), plus an additional amount that is c $120- 175m. The majority of the prize fund is paid to teams based on their position in the Constructors’ Championships the previous year so in 2017, Williams is receiving commercial rights income based on its fifth place finish in the Constructors’ Championship in 2016.The correlation between Williams Formula One’s revenue and its performance on the track is evidenced by Exhibit 3. Generally, an improved performance on the track is followed by higher revenues the following year and vice versa. Exhibit 3: Williams Formula One revenues compared to performance in the Constructors’ Championship, 2012-16 140,000 0 Position in Constructors' Constructors' in Position 120,000 1 2 Championship 100,000 3 80,000 4 5 60,000 6 40,000 7 8 20,000 9 Formula One revenue (£000) revenue One Formula - 10 2012 2013 2014 2015 2016 Formula One revenue Constructors Championship position (RHS) Source: Williams Grand Prix Holdings 2016 Annual Report and Formula One website The distribution of the remainder is based on the following principles and measures of performance: Success – meaning the long standing of a team within the World Championship and its reputation within the sport Heritage – reflecting the extent of a team’s brand presence and perceived value to the World Championship over time Longevity – measuring the contribution of a team by reference to the length of time a team has been participating in the World Championship Commitment – recognising anticipated ongoing participation and investment of a team, including preparedness to provide a meaningful parent company guarantee, in order to secure medium- to long-term participation of teams and therefore the ongoing financial viability of the Formula One Group. While there are some fixed fees, most of the prize fund elements are variable and are dependent on Formula One’s financial performance. Recent press speculation has suggested that in 2017 Ferrari will receive c $180m in commercials rights income, over twice as much as Williams who is estimated to receive $79m. Ferrari, Mercedes, Red Bull and McLaren are known to have agreed separate deals for Constructors’ Championship payments. Ferrari receives an additional payment for being the longest standing team.