JPM European Media Internet 2019 Outlook_watermark

vk.com/id446425943

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

Traditional pay TV subs are going backwards and ARPU is declining as the mix of subscribers skews to lower value OTT customers with a fraction of the ARPU. Pay TV may be less resilient in a macro slowdown given new / cheaper choices while pay TV has high operational gearing given largely fixed costs. While culture / language provides some degree of protection from global giants, we value Vivendi’s French pay TV business (C+ France & Canal Overseas) on just 2.3x EBITDA – but still see significant upside for the group (largely from music).

Outdoor – Macro uncertainty drives volatility short term, but the structural growth opportunity is exciting

We believe the structural growth opportunity from Digital Outdoor (due to rising urbanization/commute times, far better pricing than analogue and rising ad share of Outdoor) remains unbroken. Short term, macro volatility will likely continue to weigh on the subsector (it is the business model with highest operational gearing in the space). Strong demand for Digital Outdoor is attracting new players to the market (for example Global has now become a strong player in the UK (c20% of JCD revenues) through recent acquisitions. In this context we flag that the vast majority of Outdoor inventory is secured long term, creating high barriers to entry. We believe new entrants aim to partner with established Outdoor players rather than spending capex themselves.

Content – Benefiting from a global roll out and price inflation

We believe content producers of high quality and family content have a bright future. The global roll out of new shows/movies offers plenty of monetisation potential and with several new buyers of content entering the scene (now also OTT operators and Telcos, next to Pay-TV providers and FTA operators) we observe rising demand for quality content, leading to price inflation. Also, new devices (such as iPads, smartphones) allow consumers to watch content everywhere, any time - making content producers less dependent on FTA operators di establish strong merchandise businesses. In the space we like Entertainment One (OW) – Structurally, the company is well positioned to benefit from content cost inflation. The family franchise (Peppa, increasingly also PJ Masks) continues to grow strongly in new territories such as China and the U.S., FCF is improving in the next few years and we see M&A upside risk.

Agencies – Turnaround hopes

Agency industry growth has seen a modest acceleration in 2018 from c1.0% in 2017 to c1.2%, largely a function of quadrennial events, some stabilisation in FMCG spend and hopes of stronger global GDP growth although these began to fade in H2. Creative remains the weakest discipline, with advertisers spending less on the production of each ad and running them for longer. Media buying remains robust benefiting from the structural growth of programmatic / digital / performance advertising. While the US peers have re-rated and outperformed vs low expectations at the start of the year, WPP significantly underperformed. This followed earnings downgrades in 2018, driven by reduced spend from its existing client base which is skewed towards FMCG’s, and also to 2019 given client losses which were perhaps exacerbated by WPP being focused on succession / management change during an important period of client reviews.

21

vk.com/id446425943

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

We see an ongoing role for agencies and believe that some of the structural concerns around in-housing (expensive / difficult for clients to maintain best expertise in house while agencies can amortise cost across a broader base & aggregate spend / data to drive network effects and more efficient buying), competition from consultancies (for business transformation upside, rather than existing business) and disintermediation (agencies are not losing significant share of existing activity, rather existing growth is muted and they do not fully participate in SME, performance and emerging market growth) are overstated. However, agencies need to break down traditional silos to provide a holistic, integrated offering to clients, & to re-deploy / re-organise to create an “Agency Flywheel” centred around data & technology. Investment in performance based marketing & a new (lower cost) model for SMEs could help close the gap between agency and ad mkt growth.

WPP (OW) is a turnaround story with potential upside from a re-rating, if it can deliver. Likely targets for costs savings and a return to industry growth at some point in the future may provide near term support. While, it will likely take at least 6 months to get visibility on whether its strategy is gaining traction, a 7% dividend yield may provide support in the interim.

Publicis (OW) trades on a premium to WPP but is further advanced in its own business transformation & is closer to returning to industry growth. Publicis screens poorly in the slowdown phase of the investment cycle given its low growth, but ranks higher in the “contraction” given its strong balance sheet, low risk and attractive valuation, and the reduced weighting of growth.

Publishing / Info Services – “Must have” Data, Info & Events

Info Services companies provide “need to have” information for professionals through subscription-based models. Dominant positioning in targeted end markets provide high barriers to entry, while embedding strategies create close customer relationships and high renewal rates. Innovative Info Services companies are astute at creating and cross selling new data analytics products. We see Info Services stocks offering compounding top-line growth and high profitability. A key characteristic we look for in Services companies is pricing power, particularly in the current backdrop of higher cost inflation. Informa has a strong portfolio of must attend events – even in a potential downturn buyers and sellers have to meet to do business and to understand competitors’ products/initiatives. RELX (OW) and Informa (OW) are our preferred Information Service / Publishing plays.

Internet – Delivery Hero & Schibsted our preferred names

We believe the Internet operators are relatively resilient from a revenue perspective as the vast majority of growth is structural. That said, we flag that multiples have declined -50% in the last contraction (when looking at players like Google or Microsoft) phase and multiples have already reduced in H2 by ~30% for the wider Internet space. Therefore, we see ~30% downside but significant upside in the long term. Delivery Hero (OW) lags a catalyst short term which is the key reason why we take the name form our Analyst Focus List. However, the business has only limited cyclical exposure and offers very attractive risk/reward at these levels while Schibsted (OW) is to crystallise value from its MPI spin off.

22

vk.com/id446425943

vk.com/id446425943

vk.com/id446425943

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

both higher investments and slower top line growth and de-rated by -17% (with the market factoring in a structural decline). Outdoor earnings were more robust but the sub-sector de-rated 19%. The agencies saw a -7% earnings downgrade led by WPP but the multiple remained unchanged as a reflection of low expectations at the start of 2018 & an acceleration in organic growth for the peer group as a subsector.

Below we provide a detailed overview of the re-rating and level of EPS revisions in 2018 for our coverage universe.

Table 8: Component of 12m performance

	2019E EPS Revision	2019E PE revision	Share price move
Ocado	na	na	133%
Schibsted (A)	-10%	43%	30%
Pearson	-1%	31%	30%
Auto Trader	1%	28%	29%
Wolters Kluwer	4%	19%	23%
Entertainment One	-25%	64%	23%
Interpublic	11%	6%	18%
Scout24	6%	5%	11%
Rightmove	-8%	19%	9%
Omnicom	1%	6%	7%
Ubisoft	14%	-8%	5%
Takeaway.com	na	na	2%
Vivendi	-15%	19%	1%
RELX PLC	-2%	-1%	-3%
Informa	5%	-11%	-7%
ITV	-14%	4%	-11%
Publicis	-14%	3%	-11%
HelloFresh	na	na	-14%
Delivery Hero	na	na	-15%
Mediaset	-9%	-9%	-17%
JCDecaux	-12%	-7%	-19%
Axel Springer	5%	-22%	-19%
RTL	-17%	-7%	-22%
M6	-13%	-18%	-28%
Stroer	-9%	-23%	-30%
JUST EAT	-34%	7%	-30%
WPP	-27%	-10%	-34%
ProSieben	-3%	-34%	-36%
Mediaset Espana	-30%	-9%	-36%
TF1	-15%	-28%	-39%
Atresmedia	-23%	-28%	-44%
Purplebricks	na	na	-51%

Source: Bloomberg consensus, Bloomberg prices as of 05/12/2018.

25

vk.com/id446425943

vk.com/id446425943

vk.com/id446425943

vk.com/id446425943

vk.com/id446425943