JPM European Media Internet 2019 Outlook_watermark

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

The top 4 ranked stocks in a contraction are currently Vivendi, RELX, Informa and

Publicis while the bottom 4 stocks are Delivery Hero, Mediaset, JCDecaux & Schibsted.

Table 6: Valuation metrics by sub-sectors

	Slowdown	Contraction	Recovery	Expansion
Top 1	RELX PLC	Vivendi	ProSieben	ProSieben
Top 2	Vivendi	RELX PLC	Atresmedia	Stroer
Top 3	Ubisoft	Informa	Stroer	Ubisoft
Top 4	Entertainment One	Publicis	Mediaset	Atresmedia
Average 19E P / E	17.5x	15.6x	9.1x	11.5x
Bottom 1	TF1	Delivery Hero	Ocado	Omnicom
Bottom 2	JCDecaux	Mediaset	Wolters Kluwer	Rightmove
Bottom 3	Mediaset	JCDecaux	Rightmove	Wolters Kluwer
Bottom 4	Atresmedia	Schibsted	HelloFresh	HelloFresh
Average 19E P / E	14.1x	37.7x	28.0x	16.6x
Publishers	1	1	6	3
Entertainment	2	2	3	1
Agencies	3	3	4	6
Internet	4	5	5	4
Broadcasters	5	4	1	2
Outdoor	6	6	2	5
Source: J P. Morgan estimates

We advise to play stocks that screen in both a slowdown & contraction

While contraction has outperformed slowdown in recent weeks, the Cycle Investing framework would suggest investors should persevere with a slowdown portfolio until the QMI falls further – potentially the market is oversold and a rally at the beginning of the year could see the prior market leaders (quality growth) regain lost ground. However, we are mindful that the slowdown will likely give way to contraction in the coming months. As such we would highlight stocks that screen well across both phases - RELX, Vivendi, Informa, Entertainment One, Ubisoft and Wolters Kluwer. In contrast, JCDecaux, Stroer, TF1, Atresmedia and Mediaset screen poorly in both the slowdown and contraction.

See detailed company ranks on page 14

See the Appendix - Introducing MediaScreen for a detailed methodology overview

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

Key picks reflect cautious view

Vivendi (OW) – Music to drive further outperformance

Vivendi is one of the best ways to get exposure to Music, which in our view offers the best content story in media. We believe Universal Music more than underpins Vivendi’s entire EV and has the potential to drive multiples of upside as subscriptions become the global norm, driving revenue growth, margin expansion, improved earnings visibility and a re-rating. Vivendi’s other activities have been a drag on earnings and sentiment – however, expectations and valuations for these activities are now low, reducing the risk of further disappointment, and they could become a source of upside should momentum improve.

While UMG growth will slow in Q4 given the greater weighting of physical, tough comps against a strong Q417 release schedule and loss of one time revenue, we would expect growth to accelerate in 2019 as physical and download drag diminishes as overall growth converges with that of streaming. We expect the planned auction of up to a 50% stake in UMG to strategic investors to give visibility on a higher valuation than the c€18bn implied by the current share price. It could also bring in partners that could increase visibility over UMG’s growth, market share and share of industry economics. We expect the stake sale to be followed by a significant cash return (a buy back via a tender offer) which will provide technical supported and help pull forward future upside for investors.

Vivendi trades on c20x earnings / NOPAT and offers 3 year NOPAT / EPS growth of c16%. We are 3% below consensus in 2018 but 6% and 13% ahead in 2019 and 2020 as our above consensus music subscriber and revenue growth drives margin expansion.

MediaScreen would suggest that Vivendi is the right stock to own at this point of the investment cycle. Vivendi screens well in both the slowdown (large cap, high quality, growth) and contraction (large cap, low risk, high quality, strong balance sheet, low operational gearing, subscription based revenues, limited advertising exposure and structural rather than cyclical growth).

Entertainment One (OW) – Family driving global growth

As a producer of strong content assets (c.85% scripted), the business benefits from significant price inflation in the space and increasing monetization opportunities globally with additional upside potential from M&A. We are excited about the Family franchise (Peppa and increasingly also PJ Masks) with a successful roll out in the U.S. and China providing earnings upside risk - In our view, the company's guidance for doubling retail revenues between 2015 and 2020 appears too conservative – our base case ends up +30% higher and our blue sky scenario offers an additional 150p upside to our target price. We also see additional upside from M&A. eOne attracted a preliminary proposal from ITV in 2016, highlighting the perceived value for other Media companies and possible M&A-related upside. We also expect improving Equity FCF going forward. eOne’s ability to generate FCF remains a key focus for investors. We expect the company to generate c.£20m of Equity FCF in 2019E. eOne ranks well in both slowdown and contraction phase in our MediaScreen given limited ad exposure and defensive, high growth profile.

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

RELX (OW) - Defensive, compounding growth

RELX is leveraging content and technology to create increasingly sophisticated data driven decision-making tools and to drive new revenue streams. RELX benefits from strong growth in its end markets, including academic research output, face to face meetings, and the demand for data driven decision making tools that can increase the productivity and improve the outcomes, and help quantify & price risk for insurance, fraud, identity and online payments.

We expect group organic revenue growth of c4%, EBIT growth of c6% and EPS growth c9% over 18E - 21E supported by diversified revenue growth, gradual margin expansion, bolt-on acquisitions and buybacks.

RELX trades on 18.7x 2019 EV/NOPAT, an 15% discount to its US Information Service peers. We believe this represents an opportunity to buy into one of the best quality / compounding growth stories in European media.

RELX is top ranked in MediaScreen in both the slowdown and the contraction – making it a core holding in the current uncertain environment. RELX screens well in the slowdown as it is large cap & offers low risk, high quality growth. RELX is also top ranked in the contraction as it has: a strong balance sheet; low operational gearing; good earnings visibility / limited earnings volatility; geographical diversification; subscription based / recurring revenues derived from the provision of mission critical / must have data and information; limited advertising exposure and structural rather than cyclical growth.

Informa - Upgrade to OW – Right place at the right time

The events space (51% of Informa’s 18E revenues and 56% of profits) is one of our preferred subsectors in Media given 1) the limited impact from digital on the subsector (you can’t “Amazon” the events business); 2) upside potential from further consolidation in the space; 3) sustainable margins; 4) well-diversified portfolios with a high share of Emerging Markets exposure; and 5) a relatively manageable degree of cyclicality. We argue that Informa’s new events portfolio (Global Exhibitions plus UBM Events) is more defensive than the market anticipates given the high share of must attend events. In addition, we flag Informa’s remaining revenues are mostly subscription based and defensive. This makes Informa attractive in the current environment of macro uncertainty – after the recent weakness we see the shares as attractive, trading on 10.3x 2019E EV/EBITDA for a 2018-2021 EBITDA CAGR of +10%, and we upgrade the shares to OW with an unchanged price target of 812p (+23% upside). Informa scans well in MediaScreen (#5 in slowdown/#3 in contraction) given the high quality of its earnings.

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

Key Underweights

Mediaset – Downgrade to UW

Mediaset has outperformed despite a deteriorating Italian macro

We downgrade Mediaset to Underweight. Mediaset has outperformed its broadcasting peers by c25% over the past 3 months despite advertising downgrades in both Italy (driven by the absence of sports events / rights in Q4 2018 / 2019) and Spain, and a significant deterioration in Italian PMI’s in October to the lowest level in 5 years which recently led our economists to downgrade their 2019 Italian GDP growth from c1.5% to c0.5%.

Risk of a de-rating and earnings downgrades

Mediaset is the most expensive broadcaster under our coverage, trading on 15x 2019 EV / NOPAT, a 40% premium to the peers, for only slightly stronger growth (c6% vs 4% for peer group). We would argue that at this point of the cycle, particularly with Italian PMI’s already under pressure and potential Italian deficit risks the shares are unlikely to outperform in 2019. Mediaset should trade at a discount to the peer group as its earnings are relatively sensitive to the macro environment as it’s a purer play on advertising, with lower margins / higher financial leverage and hence greater operational gearing.

PT cut to reflect downgrades, reduced likelihood of near-term VIV settlement

We have cut our 2019 earnings by 6% and by 8% in 2020 to reflect weak PMI’s, deficit risks and our economists reduced GDP growth assumptions. Our 2020 EPS is now 7% below the consensus. We cut our PT from €3.1 to €2.0 to reflect forecasts downgrades and also that we have reduced the value of a pay TV settlement with Vivendi / benefit from an ongoing agreement from €500m to €200m to reflect that a legal process is likely to take many years and there seems to be little / no progress on finding a commercial agreement. Our PT’s suggests -23% downside for Mediaset vs 35% upside for the broadcasting peer group (ex. Mediaset).

MediaScreen – wrong phase to own a pureplay broadcaster with leverage

Mediaset ranks poorly in MediaScreen in both the slowdown (31/32) given small size, high risk, low quality, low growth, and also in the contraction (30/32) where the benefit to Mediaset of the increased importance of value at the expense of growth is offset by the increased weighting of risk. Mediaset ranks highly in the “Recovery” (4/32) and “Expansion” (8/32) but it seems likely that even in the event of a short & shallow slowdown it will be several months before the investment cycle moves back to “Recovery”.

Rightmove (UW) – Reduced resilience

Rightmove has been a strong outperformer in recent years, but we see clouds on the horizon. High operational gearing of its business model and its dominant market position have led to fast recent EBITDA growth and high margins. However, we believe the current valuation still factors in perfect execution, while we see several challenges ahead from 1) The migration from print to online coming to an end, making the business more cyclical; 2) Exposure to a consistently weak UK housing market and 3) The rise and underappreciated market share gains of online agents, such as Purplebricks. This is a new development and likely to cause traditional agent

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

commission rates to continue to see sharp declines, in our view. We calculate that commission rates will fall further causing further pressure on Rightmove’s clients. Although we do not believe that the business model will be meaningfully threatened short term, we do see downside risk from further consolidation of agency offices, declining housing transactions and broadly stable house prices. Further, the strong rise of (cheaper priced) online agents – we assume at least a 20% share by 2022 versus 6% today – is likely to result in a further decline in commission rates. In terms of valuation, Rightmove trades on a premium relative to its growth profile and significantly higher versus the rest of the Media and Internet sector. Clearly, Rightmove ranks relatively well in MediaScreen (6/32) in the slowdown phase largely given the high quality and resilience of its growth profile. We believe the past is not a good indication of Rightmove’s future with potential UK agent consolidation and lower ARPA growth likely to have an impact in 2019.

AutoTrader (UW) – Expensive growth

We fully appreciate that Auto Trader remains the dominant #1 car classifieds site in the UK and that in recent years Auto Trader has levered a strong UK used car market and a shift of classifieds spend from Print to Online. Although the recently announced move into car auctions may provide some upside risk to earnings, we see the upside potential as rather low with established players such as BCA likely to roll out digital assets more aggressively to keep market share in this segment . This comes in addition to inflated valuation relative to growth profile (16x EV/EBITDA 2019E for +5% 19E-21E EBITDA CAGR) and as a result, we remain UW the shares. We flag that the Online penetration of UK Car Classifieds is already high at 85-90% (compared to Jobs at c.50% in Germany), making the business now much more cyclical than in recent years. Also, recent UK car data remains very volatile, driving negative sentiment. Rising interest rates and tighter regulation for credit may also dampen car demand in the future. Although unlikely short term, we believe new disrupters may enter. We note that Amazon announced the launch of Amazon Vehicles in the UK last year. We flag that the site is so far simply a car research website for consumers. However, we acknowledge the potential that Amazon may sell new/used cars directly to consumers in the future. We flag that AutoTrader doesn’t scan as a key Sell in MediaScreen given its high share of B2B revenues, and resilient earnings. However, we believe going forward earnings expectations will suffer from rising investment requirements due to competition.

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

Other recommendation changes

Mediaset Espana - Downgrade to Neutral

Mediaset Espana has outperformed its peers by c10% over the past 3 months with cost savings offsetting slower ad growth, and the shares supported by its cheap valuation. While it continues to trade on <9x 2019 EV/NOPAT, a c10% discount to peers for only slightly slower 3 yr NOPAT growth of c3% vs 4%, it may struggle to outperform our wider universe until leading macro indicators and ad momentum improve. Q119 should well benefit from the later timing of Easter, although this will put pressure on Q2 which also faces a tough comp without the World Cup. We downgrade our 2019 EPS by c7% to reflect a more cautious macro outlook and slower ad growth – our 2020 EPS is broadly in line with the consensus given our assumption that Mediaset Espana can manage its costs to maintain EBITA in a modest slowdown. Our PT falls from €8.6 to €6.9. MediaScreen - Mediaset Espana ranks poorly (27/32) in the current “slowdown” phase of the investment cycle given low growth but its ranking improves (18/32) in the “contraction” with support from its cheap valuation and strong balance sheet.

RTL Group - Downgrade to Neutral

We downgrade RTL from OW to Neutral. RTL has outperformed the peers by c7% over the past year. Improving operational momentum stalled in Q3 with a step down in German ad growth which has continued into Q4. We believe this partly reflects the relatively loss of audience share to Pro7 but also weakening macro momentum. It remains to be seen whether this will be short-lived but German ad growth is likely to remain lackluster in Q1 given the timing of Easter which, along with the absence of the World Cup, will benefit Q2. We cut our 2019 EPS by 10% to reflect a cautious macro backdrop, weaker ad growth, €20m of incremental programming costs for international football and €35m of OTT / streaming investment (content, platforms, data and technology).

RTL trades on 11.0x 2019 NOPAT for 2% 3 yr growth vs 11.2x and 4% for the peer group. We cut out PT from €80 to €56. We are also somewhat frustrated by the slow pace of strategic change – we would like to see a greater sense of urgency and RTL taking a leading role in national / pan-European co-operation & consolidation, and to invest from a position of strength to drive OTT, DTC / distribution fees, smart reach & data driven targeted advertising. We have a preference for Pro7 which is building a new model for FTA, trades on a similar multiple but offers faster growth. MediaScreen – RTL ranks 26/32 in the slowdown given slow growth and poor earnings momentum. Should we move to contraction it moves up to 18/32 given the increased weighting of value vs growth.

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

Fundamental views by sub-sector

Music – The best content story in Media

We believe that Music is the best content story in music. The industry is emerging from 15 years of digital disruption and decline. The shift to streaming and subscriptions transforms the user experience, the monetization from a very low base on significant elements of fixed cost and the visibility and quality of earnings as the industry migrates from physical to digital, from one-off unit sales to subscription revenues shared on the basis of listening. Given Music’s unique quality – that we listen to the content again and again, and the best content for the rest of our lives – music is becoming a fast growing annuity stream. Music is also very strategic to tech and telco companies, which are subsidizing and promoting the take up of digital music services, as it can drive engagement and support a broader ecosystem, and is the key application and beneficiary of the rapid take up of growing array of smart speakers / devices. We expect streaming to drive many years of high single / double digit revenue growth, margin expansion and a re-rating. Music can be played through Vivendi (OW).

Video Games – Transformed by digital / connectivity

Connectivity / digital transforms: 1) the user experience with online and multi-player games driving social interaction and increased engagement; 2) monetisation as a result of increased back catalogue sales, player recurring investment (PRI) and the opportunity to go direct to the consumer for PC today, and potentially for streaming services in the future; 3) profitability with a higher gross margin on console units and lower development and marketing costs on PRI revs; and 4) the visibility / quality of earnings with recurring revs and reduced dependence on new releases / hardware cycles. We believe that Ubisoft (OW) is an attractive play on video games. It has built a strong portfolio of titles, & is differentiated by its IP ownership & in-house development capabilities. We expect Ubisoft to deliver industry leading growth as it gains share on PC, mobile & in china, and plays catchup on player recurring investment.

Broadcasters – Structurally constructive, wrong pt of cycle

Broadcasters trade on 9x, a c45% discount to the 5 year average while offering +4% growth. We believe that structural concerns are overstated and that new growth opportunities, and the potential for co-operation / consolidation, are overlooked. However, they could well remain value traps during the “slowdown” / “recession” phase of the investment cycle and will only outperform / re-rate when we move to “recovery” and earnings momentum stabilizes / improves. We maintain a selective approach with Pro7 (OW) and ITV (OW) our preferred names.

Traditional Pay TV – Structural challenges

The broadband delivery of TV services transforms the FTA user experience, driving a multiplication of choice and enhanced functionality, & allows new SVOD entrants, with better business models (no boxes, dishes, truck roles and call centers) & no legacy revenues / costs / capex / debt, to give consumers new choices at cheaper price points. Technology also enables Broadcasters to cut out the “middle man” & go direct to the consumer. Pay TV operators, who traditionally rented rather than owned most of their content, risk losing content (and subs) or having to pay more to retain it.

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