* Source of opportunity
We have removed the Not Rated designation from Vivendi shares. Vivendi is now on the Buy List, with a 12-month price target of €27.3 (c.15% upside). Our positive thesis is based on: (1) management discipline on capital allocation with scope for significant returns, (2) a more constructive view than the market on Canal+ given tempering cyclical/competitive headwinds in France and the strong structural growth of international Pay TV and
StudioCanal, and (3) a return to structural growth from 2016 and healthier margins for the music industry, driven by the migration to streamingservices. As a market leader, we see UMG as a key beneficiary.
* Catalyst
With firepower of >€10 bn, future deployment of cash will be a key driver of stock performance. Despite a lack of clarity over future M&A plans, we expect management to continue to show financial discipline given its track
record. We believe the outlook of Canal+ is better than perceived given lower macro and competitive headwinds in France, strong content differentiation protecting it from OTT threats and one-third of assets enjoying strong structural growth. We forecast UMG to return to growth in 2016 as streaming overtakes physical/downloads and improves the monetization of music content – a process that could accelerate with the
launch of Apple’s paid streaming service this year.
* Valuation
At 9x 2016E core EV/EBITDA vs. the media sector average of 12x, valuation looks undemanding given the turnaround potential and the optionality on cash uses. This is underpinned by a committed dividend of €2/share in
2015/16 (c.8% yield). Our 12-month SOTP-based price target of €27.3 is based on 9.6x EV/EBITDA for Canal+ and 12.7x for UMG. We reduce our EPS estimates, mainly to reflect the deconsolidation of GVT.