Q3 results and the call for two years of reinvestment were a wake-up call on the issues faced by
Canal in France – which were the drivers of our March downgrade report, “Winter is coming”.
Weak Q3 trends
EBITA at the group and divisional levels were substantially below (already cautious) consensus
expectations; sales missed by 2%. But for StudioCanal (5% of group revenue) virtually every single
business line grew less in Q3 than in H1. Net income was somewhat protected by very low taxes.
Canal – French issues worsening in Q3
The fall in French pay TV accelerated from -1% in Q1 to -1.5% in Q2 and -3.5% in Q3. Core pay
TV subs’ decline accelerated too, only partly offset by Canalplay subs at c.EUR7 ARPU vs EUR44
for the core, while EM growth was softer (2%). All this and cost inflation led EBITA to fall c.10%.
More pain ahead at Canal – doing the right thing, but it will hurt
Vivendi announced 2 years (‘16-17) of new investments in content to counter the tough competitive
environment in France. This is alongside a planned c.EUR150m rise in costs (mostly on sports)
and the impact that core subs loss will have on revenues – we are comforted in our bearish call on
Canal. We think management is making the right move in reinvesting and restructuring Canal:
there is simply no other way out in a Netflix-era. But this will hurt, much more than many expected.
Music – no Apple gain yet, and visibility remains very low
Download and Physical’s decline worsened while streaming did not benefit as yet from Apple. Org.
growth turned negative again; margins fell. VIV admitted it had no visibility on short-term trends.
Deep cuts, downside to fair value: VIV is only for patient investors – remain Underperform
We cut our EBITA, EPS and target price by over 10% (see overleaf). Our new EUR20 fair value
shows downside. We believe management’s plan to rebuild value at VIV will eventually succeed
but will likely take a lot of time. Given generous multiples, we see better opportunities elsewhere.