VIVENDI - BOFA tgt 36€
Music is to us the most undervalued content on the planet … The value of music has halved over the past 20 years while that of audiovisual content has tripled. Only a tiny fraction of our listening is being monetised. … Subscriptions will drive revenues from a very low base … Subscription services transform the monetisation of music and improve the quality of earnings. Take up is being driven by a better consumer experience and convergent offerings from telco, tech and internet companies using music to drive subscriber benefits, stickier ecosystems and share of much bigger adjacent markets with more than $1.5tn of revenues. Ad funded services seed the market and windowing will drive upselling to subscriptions (and a c30fold increase in revenues) with new releases, exclusive content and enhanced functionality restricted to premium tiers. Smart phones and telco bundles also open up c6bn customers in emerging markets, many of whom have not had the opportunity to purchase or play music in the past. n… on a largely fixed cost base; record labels own catalogue There is little cost associated with incremental digital revenues with the record label, artist, publisher and songwriter sharing in the upside. Music is unique given its concentration (UMG has a c35% market share vs Disney’s say less than 1% share of the AV market) and the importance of catalogue (to which UMG has the rights for more than 50 years) which increases with the monetisation of airplay rather than one off purchases. Vivendi is much too cheap – upgrade PO to €36 / share We upgrade our musicforecasts ahead of Apple’s re-launch of Beats and adjust our margins to reflect the importance of catalogue. We forecast 10 year recorded revenue growth of c8% and a 2025 margin of 27% (11% in 2014), and upgrade our 2020 group EBIT forecast by 60%. After stripping out stakes and applying sector leverage, Vivendi trades on just 13.5x 2016E EPS while it offers four year EPS growth of above 20%. Our SOTPs increases to €36 / share, implying c70% upside potential post 2015 dividends. Blue Sky upside … 40% subscription penetration of developed markets and $7/m of ARPU in 2025; 20% penetration of the ROW with $3.50/m of ARPU implies c€75/share.