Backing music content and Bollore
■ Investment case: Backing music content and Bollore. Our investment
thesis for Vivendi is shaped by the following considerations: (1) Global music
revenues are at an inflection point where growth in streaming music sales is
outpacing the decline in physical music sales and digital download sales. We
expect strong industry revenues to ensue and for the change in mix to have
a positive impact on margins. (2) Universal Music Group looks well
positioned to capture the growth in global music revenues given its dominant
30% share of global recorded music and exposure to Europe and the US,
which are more advanced from a streaming perspective. We see the
potential for a five-year EBITA CAGR of 11%. (3) Canal+ International is
likely to deliver strong growth from Africa and Vietnam. (4) Vivendi has €8bn
net cash on its balance sheet and we see potential upside from the company
making a value-enhancing acquisition in the media or content space in
Europe or Africa in the €1-8bn range. We expect any potential acquisition to
take up to two years and see the potential for Vivendi to return some cash to
shareholders in the short term. (5) Vivendi is good value in our view trading
on 12x FY16E EBITDA excluding cash vs the European media sector (ex
internet) on 13x FY16E EBITDA.
■ Earnings potential: We forecast +3% and +6% EBITA and +20% and +17%
EPS growth in 2015 and 2016. We are in line with consensus for 2015E and
5% and 10% above consensus for EBITA and EPS in 2016E, respectively.
Our Universal Music Group revenue forecasts are above consensus due to
stronger growth in streaming. Our higher EPS forecast is due primarily to
higher associate profits driven by Vivendi's 19.9% stake in Telecom Italia.
■ Catalysts: We expect a strong 3Q result driven by growth at UMG.
■ Valuation: Our €25 TP is based on the average of our €27 DCF valuation
(WACC 8.7%, terminal growth 3%) and €22 SOTP valuation. This implies a
12x 2016 EBITDA excluding cash vs European media peers on 13x.