UMG upside from margin growth and China
* We upgrade Vivendi to Outperform from Underperform (new target price €23.40) based on our updated views on the global music industry, a deep dive into the emerging-market opportunity and margin growth potential for UMG as well as our proprietary survey of French pay TV customers. We increase 2019E EPS by 9%, putting us 21% ahead of consensus.
* Valuation: Our new €23.40 TP (from €17.50) is SOTP-derived and includes an unchanged 15% conglomerate discount and a €19.9bn valuation for UMG, which puts the business on 16.6x 2019 EV/EBITDA. This is a 60% premium to European Media on 10x, which we think is warranted given UMG's attractive structural growth opportunity compared with cyclical and structural concerns for free-to-air broadcasters and agencies. Our new blue sky valuation is €30.15, while our grey sky valuation is €17.45.