JPM_Europe Year Ahead 2019_watermark

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

consolidation of GM Europe operations and slower turnaround of plans than anticipated would bring additional headwinds to the group.

Natixis (Overweight; Price Target: €6.50)

Investment Thesis

We reiterate our OW on Natixis, which we believe offers: 1) a resilient business mix due to its less capital-intensive fee-based model, with gearing to high-PE Asset Management (~40% of group PBT); 2) one of the highest dividend yields in the sector, at av. ~12% in 18-20e, based on cumulative ordinary dividends of €3.9bn or average payout of 70% excluding the exceptional dividend of €1.5bn paid in 2019e; and 3) undemanding valuation multiples, with the stock trading at only 9x PE in 2019e and 8.4x PE in 2020e broadly in line with the sector despite the higher yield.

Valuation

Our price target (SOP-based, Dec-19e) for Natixis is €6.5. Our SOP multiples are differentiated by businesses, e.g. 6-11x for CIB, as well as franchise quality.

Natixis – SOTP based Dec-19e Valuation

€ million

	2020e					% of	Value/	% of
	Earnings	P/E	Capital	P/BV	AuM (bn)	AuM	share	total	Valuation	ROE
Corporate & Investment Banking	948	10.0	7,585	1.2			3.0	47%	9,481	12%
Asset & Wealth Management	853	11.0	1,433	6.6	866	1.1%	3.0	46%	9,387	60%
Insurance	60	13.0	188	4.1			0.2	4%	775	32%
Specialised Financial Services	319	10.5	871	3.8			1.1	16%	3,345	37%
Central revenues/costs	-286	10.5	1,111	1.0			-1.0	(15%)	-3,013
Excess Tier I	-90		383				0.1	2%	383
Group	1,803	11.3	11,572	1.8			6.5	100%	20,358	16%

Source: J.P. Morgan estimates.

Risks to Rating and Price Target

Key risks to achieving our rating and price target include:

The performance of the capital markets and their impact on both Corporate & Investment Banking and Asset Gathering (Asset Management, Insurance, Private Banking) revenues.

Asset quality in the group's corporate loan book (Europe mainly), in particular oil & gas exposures that are sensitive to oil prices declines.

Downside risks also include:

Outcome on regulatory proposals, whether on market risk (Basel trading book review, securitisation), credit risk (changes to internal models for corporates and specialised financing), and operational risk (with internal loss multiplier including historical litigation/losses).

Sovereign risk in Europe and France: negative funding implications from the macro uncertainties in the Eurozone.

Litigation risks.

LafargeHolcim Ltd (Overweight; Price Target: CHF55.00)

Investment Thesis

We upgrade our recommendation on LHN to OW with a Dec-19PT of CHF55 (+18% upside). Following poor share price performance YTD which struggled on continued earnings downgrades, we think Q3 marked a turning point. We now see support and upside risks to consensus expectations, with scope for meaningful improvement in cash flow generation from tighter control from the new management. Against a bearish investor positioning (12% short interest) and broadly negative sell side recommendations (only 30% buys), we identify a number of potential catalysts between the upcoming CMD, potential divestments (Indonesia) and easy comps for upcoming results. On our revised estimates, the stock looks attractive on 2019 PE of 12x, div yield of 4.3% or FCF yield of 7.6% while our bull case suggests 28% upside from here.

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

Valuation

We derive our EV/EBITDA-based price target using the historical average multiple of 7.7x applied to our 2020E EBITDA forecast. Definition of enterprise value: We use the following formula to calculate EV: (Current Market Capitalization) + (Net Debt) + (Book value of minorities) + (Other EV includes the following: 1) unfunded pension liabilities and 2) provisions for fines, etc.

Risks to Rating and Price Target

We believe a major risk to our recommendation is with regard legal charges put forward against Lafarge SA in relation to the operations in Syria during 2011-14, following earlier charges against former executives. We note a potential additional risk associated to potential litigations from US authorities following the opening of French ones on the Syrian past operations. Other risks are related to the group’s macroeconomic exposure as well as cost inflation headwind. The group’s largest markets are the US, India, Canada, Nigeria and Australia, and slower-than-expected growth in these markets would impact our forecasts. Fuel costs (mainly coal and petcoke) and currency exchange rates (mainly USD, INR and EUR vs. CHF) have a considerable impact on the company’s earnings.

Applus (Overweight; Price Target: €14.30)

Investment Thesis

We believe that Applus will benefit from a number of structural growth factors. In particular, its market-leading position in ATIC services for the oil and gas sectors has meant that it has benefitted from increases in health & safety standards in the industry, and the development of new oil and gas fields. It is the most levered of its major peers to a recovery in activity in oil and gas. Applus' other main sector exposure is to Automotive. The two Auto-related divisions should benefit from rising global automotive production, increased standards for quality & safety and the awarding of Inspections contracts. The recovery in oil and gas that was evident in the H1 18 results, especially in North America, makes the current significant valuation discount to peers excessive, in our opinion, and we rate Applus Overweight.

Valuation

Our unchanged €14.30 September 2019 price target is the average of our €13.21 multiple-based valuation and €15.42 DCF valuation, rounded to the nearest 10c.

Multiples-based valuation

We apply a 10.0x multiple to our FY19E EBITDA estimate. 10.0x is a 20% discount to the 12.4x average of the international peers group (ALS, Bureau Veritas, Eurofins, Intertek and SGS). We apply the discount to take account of the greater cyclicality of Applus’ earnings given its exposure to oil and gas.

DCF valuation

Our DCF valuation (see table below) uses a WACC of 8.6% and a terminal growth rate of 3.0%. We use a risk-free rate of 1.4%. Our equity beta is 1.2.

DCF valuation

€ in millions, €

Explicit cash flows	1,279
Terminal cash flows	1,383
Firm value	2,661
Less net debt	(456)
Equity value	2,205.6
Shares	143.0
Value per share	15.42

Source: J.P. Morgan.

Risks to Rating and Price Target

The main risks to our price target and Overweight rating include:

A failure of oil and gas activity to recover, and pressure on pricing from customers and competitors.

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

The Automotive division operates vehicle inspections on behalf of the public sector. The main risk for this division would be that it could lose contracts upon re-tender.

An intensification of competitive pressures.

Epiroc (Overweight; Price Target: Skr98.00)

Investment Thesis

A best-in-class play on the mining cycle. Mining represents ~70% of Epiroc sales. Our detailed analysis of the throughcycle performance of our mining equipment coverage over the past decade confirms Epiroc as the strongest franchise in the space. We attribute this to the specifics of Epiroc's market niche; the products have short life-cycles, high aftermarket requirements (66% of Epiroc 2017 sales were aftermarket), are mission and safety critical, are technically differentiated and exposed to the expensive part of the mine incentivizing productivity-driving investment. The business also benefits from as relatively limited competition. We see Epiroc as the quality play on the mining recovery.

Epiroc can sustain superior growth rates. Since 2000, Epiroc has delivered an average of ~8% organic growth per annum v ~3% for our European Capital Goods sector. We believe this outperformance can continue driven by: 1) The positive backdrop in both mining and infrastructure markets and upside to equipment volumes, 2) Trends towards digitalisation, automation and electrification in the mine where Epiroc is well positioned to benefit, and, 3) Company specific opportunities including further leveraging the installed base, product innovation and M&A.

Quality of the group and strong earnings development not reflected in the current valuation. We expect above sector average growth rates and further margin development over our forecast period. We do not see the superior growth, topquartile margins and returns and balance sheet optionality fully reflected in the current valuation.

Valuation

Our December 2019 target price is based on applying a 12x EV/EBITA multiple to our 2020 estimates. Our chosen multiple is derived using a reverse DCF-based valuation, driven by the company’s fundamentals on growth, returns, asset intensity and capital costs.

Risks to Rating and Price Target

We identify risks to our rating and price target as:

Downturn in mining. Demand in mining continues to look robust as spend levels recover from the weakness in 2012-2016. Metals and commodities prices are currently at a level that incentivizes investment; a fall could put pressure on demand for the group's mining equipment.

Weaker macroeconomic environment. A slowing of the broader macroeconomic backdrop would likely impact investment in infrastructure projects leading to lower demand for the group's equipment.

Unsuccessful M&A. Management has outlined that acquisitions are expected to contribute to the group's growth profile. Given the strength of the group's market positions, acquisitions into more competitive and less attractive parts of the mining and infrastructure value chains could dilute the returns and margins of the group.

Third party competition intensifies in the aftermarket. We have seen peer reporting commenting on a more competitive backdrop for the aftermarket post the downturn. This is particularly true of consumables where third party competition has intensified and this may impact the Tools & Attachments margins.

Margin progression disappoints as equipment volumes recover. We believe the margin on the aftermarket sales is significantly stronger than that on equipment however we do not have an exact split making this dynamic a challenge to model. As equipment volumes recover margin expectations may be optimistic.

Failure to keep pace with industry technology change. We see the requirements of customers in the mining industry shifting and incorporating greater digital, autonomous and electric capability. Failure to keep up with competitor innovation could lead to a loss of market share.

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

Umicore (Overweight; Price Target: €48.00)

Investment Thesis

We have OW rating on Umicore. We believe there is a high likelihood of the sustainability of the strong growth and hence the rerating of the Umicore stock from the company’s exposure to the electric vehicles (EV) market. This is due to: i) a longer and more stringent qualification process for new cathode material suppliers than our prior expectations; ii) 31% CAGR in cathode material demand from ‘17-25E for 8.8% EV penetration in ’25 with S/D balance likely to be favorable till 2021/22 at least; iii) operating leverage from significant volume growth is underestimated; and iv) significant battery recycling opportunity provides offset to the likely commoditization of the cathode material market in the long term. Umicore’s planned capacity ramp is steep (EV volumes ~7x ‘17-21E) and temporary hiccups are possible. However, the structural growth outlook is strong with EPS CAGR of 20% from 18-22E with likelihood of robust growth even beyond.

Valuation

Umicore stock valuation has re-rated significantly over the past year and is now trading on 32x/29x '18/19E P/E vs. the historical median of ~16x. This significant rerating has been driven primarily by: i) a general increase in the market optimism on the structural growth in the penetration of EVs in coming years; and ii) the significant acceleration in capacity expansion plans announced by Umicore giving the market confidence in the company maintaining its leading position in the cathode materials market over next few years, at least. We believe this rerating will be sustained given the strong structural earnings growth prospects of 20%+ from 2018E to 2022E on our estimates. Hence, we use a multiple of 32x/25x our '19/20E EPS to derive our Dec '18 end PT of €48.

Risks to Rating and Price Target

We believe the key downside risks that could prevent our rating and target price being achieved include the following: 1) Umicore losses its technology edge in the next generation cathode materials technology likely to be announced over next few years; 3) EV adoption momentum slowing due to reasons which could include an abrupt significant cut of subsidies being offered currently to buyers in most countries over next 1-2 years; 3) Faster than expected capacity introduction by competitors in the cathode materials market; 4) Significant share loss in auto catalyst business; 5) Substantial decline in metal prices; 6) Further EUR strengthening.

Nestle (Overweight; Price Target: CHF91.00)

Investment Thesis

We rate Nestlé Overweight and believe it remains well placed to outperform the sector from a top-line perspective driven by RIG, alongside a sustainable improvement in its trading profit margins in constant currencies. This should drive earnings growth ahead of peers on our estimates. Further, we believe capital allocation and portfolio rationalization will play an increasingly important role in the company’s investment thesis, ultimately leading to strong operational performance and cash returns to shareholders.

Valuation

We roll forward our target price. Given the sector de-rating, we reduce our Dec-19 PT of CHF 91 (vs. Dec-18 PT of CHF95 earlier) using a 15% premium to the EU Food/HPC sector 2019E PE of 19x (vs. 2018E PE of 21x earlier) given solid earnings growth profile.

Risks to Rating and Price Target

Downside risks include: 1) further deterioration in the consumer environment in developed markets; 2) further strengthening of the Swiss franc; 3) higher input cost inflation than expected; and 4) increased price competition as a result of lower commodity costs.

Tesco (Overweight; Price Target: 265p)

Investment Thesis

We have recently turned OW on Tesco shares for the first time in five years as its cash flow, top line and balance sheet have improved on a standalone basis, while Booker adds new addressable market potential and strong execution capabilities with

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

Charles Wilson. We see Tesco as the most visible turnaround in our food retail universe (ahead of Metro and Carrefour), one that has moving parts (new management, access to new markets, synergies, cost savings, legacy assets).

Valuation

Over time, we believe the market will shift its approach to the Tesco story to one centered on capital return potential as opposed to a trading stock and the valuation approach to FCF from P/E. Our PT of 265p values the shares on ‘19/20e 7% FCF yield.

Our SOTP value of 250p separately underpins our PT. Within our SOTP, we value the following operations:

Asia at c£3.8bn.

The rest of Europe at c£2.2bn.

The bank at £1.4bn

The UK (incl Booker) at £21.4bn

We use a pension deficit of c£2.1bn (in line with 1H)

Risks to Rating and Price Target

Downside risks to our investment thesis are primarily posed by the risk of worsening top-line trends as a leading indicator of future margin development. Specifically, we think the UK might need to prove it can sustain solid LFLs in a scenario of inflation slowing down, while International (Asia, in particular) should improve its current condition. There would separately be a risk to management margin guidance in the event that it failed to deliver on the identified synergies.

Inditex (Overweight; Price Target: €35.00)

Investment Thesis

We believe that the ITX model allows it to produce a higher-quality product, in terms of its distinctiveness, its fashion content, and (potentially) its cut, than retailers operating a more conventional model. ITX is therefore able to charge a higher full price and maximize sales at full price. This has positive implications for its gross margin trajectory, with the higher price point insulating ITX from the most competitive part of the market, and gross margin stability, with ITX generally operating within a +/-50bps p.a. gross margin range. We continue to see Inditex as one of the very few structural winners in General Retail and remain Overweight.

Valuation

Our Jan-19 DCF-based PT of €35 is based on the following factors: 2018-2023e explicit forecasts, medium-term growth of 5.5%, terminal growth of 2.5%, tax rate of 22.5% and WACC of 7.9%.

Risks to Rating and Price Target

Risks to our recommendation and price target for ITX include unfavourable currency movements, a serious disruption at its Spanish hub, and a slowdown in LFL growth due to unfavourable fashion or macroeconomic trends.

Compass Group (Overweight; Price Target: 1,730p)

Investment Thesis

We like Compass given its solid topline momentum. It is the undisputed market share winner, growing business organically by >5% versus closest competitors Aramark c3% and Sodexo c1%. It benefits from its US GPO (c$22bn Group Purchasing Organization, c4x Aramark’s with Avendra/HPSI and c2x Sodexo’s with Entegra), which brings with it buying efficiencies and allows them to reinvest in the customer/ proposition/ price, a winning combination vis-à-vis tender offers. While more actions are to be taken to improve contract retention in Cont. Europe, new business wins remain at a decent level in Europe, with RoW sequentially improving.

Compass separately scores best in terms of capital allocation, growing FCF DD and returning excess cash to shareholders (£1bn special dividend in 14&17 + £1.5bn buyback over 12-16). We see c£1.5bn or c6% of market cap in cash headroom to

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

the group’s 1.5x leverage target by FY20 and believe it could trigger incremental capital return in the next couple of years, in the absence of significant M&A.

Valuation

Our Dec-19 DCF-based PT is 1,730p. We use a WACC of 7.3%, a mid-term growth rate of 4.5% and a terminal growth rate of 2%.

Risks to Rating and Price Target

Downside risks: include lower organic growth than expected, possible delays in cost efficiencies, a stronger Sodexo, US/Europe economic slowdown, food/wage cost inflation, FX. In a scenario of rising bond yields, Compass shares could de-rate relative to the market.

Reckitt Benckiser (Overweight; Price Target: 9,000p)

Investment Thesis

Improving earnings momentum, accelerated Health delivery and our expectation a split of HygieneHome (HyHo) on a twoyear basis should make RB’s equity story increasingly aligned to its sum of the parts. As we derive a Dec-19 fair value of £90, with upside risks to £125, we believe RB's current share price offers an attractive entry point to an equity story that remains unappreciated. We continue to see an inflection in earnings momentum through FY19 as well as the acceleration in Health top line over the coming quarters as key catalysts to reappraise Health’s value and start pricing in a HyHo split. Overweight, AFL.

Valuation

We set a Dec-19 TP of £90 based on standalone SOTP for RB Health and RB HyHo.

Risks to Rating and Price Target

We believe the key downside risks that could keep our rating and target price from being achieved include: continued growth disappointment, higher costs for the new organization structure, high raw material costs, and a deterioration in trading conditions in Europe and the US, driven by weaker consumer demand as well as heightened competition. Rolling out or extending the Health franchise in existing or new markets also poses risks from a regulatory perspective. Integration of potential acquisitions also poses downside risks to earnings.

LVMH (Overweight; Price Target: €360.00)

Investment Thesis

LVMH is the leader globally in Luxury Fashion & Leather Goods with Louis Vuitton, the leader in premium Champagne & Spirits and the leader in Perfume & Cosmetics selective distribution with Sephora. LVMH is reaping the rewards of having taken a number of right strategic decisions in our view (focus on innovation, not vacating the logo but enriching it, stop DOS expansion, controlled digital expansion, clean inventories in cognac and watches). The result is a market share gain in most if not all LVMH’s divisions. This, coupled with strong financial discipline is delivering superior top line and earnings growth. LVMH is no longer a proxy to the sector but an outperformer in bad and in good times and trades on at par multiples. We rate the stock Overweight.

Valuation

Our Dec-19 DCF-based target price is based on the following factors: 2019-2023 explicit forecasts, medium-term growth of 5.5%, terminal growth of 3%, WACC of 7.8% reflecting the current cost of equity, mitigated slightly by the company’s net debt position. Our price target is also comfortably supported by our SOP.

Risks to Rating and Price Target

We believe that the key risks to our rating and target price include the following:

Shocks to travelling flows;

Further deterioration in the macro economic environment, including a deterioration in the US that had been better than for peers at LVMH up until now;

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

A euro re-appreciation vs the USD or RMB or yen;

Negative impact of large M&A.

British American Tobacco (Overweight; Price Target: 4,400p)

Investment Thesis

BAT is a leading company in the global tobacco industry with a business mix that is heavily exposed to emerging markets. In our view, it offers investors a combination of strong brands, good management and resilient EPS and DPS growth. Over the medium term, we believe that the combination of these factors together with a strong positioning in NGPs will support a, so far, undemanding valuation. We rate the stock Overweight.

Valuation

Our Dec-18 TP of 4,400p is obtained by applying a 15% premium to Tobacco peers (PMI, IMB, MO, JT) on PE19E (peers trade at 12.9x vs BATS exITC 11.1x), EV/EBITDA19E (peers at 10.0x vs BATS exITC 10.2x) and dividend yield 19E (peers at 6.0% vs BATS 5.5%).

Risks to Rating and Price Target

Downside risks include: 1) faster-than-anticipated industry volume declines, 2) price competition in key markets (e.g. US, Russia, WE), 3) deterioration of macroeconomic conditions and FX depreciation in emerging markets (particularly vs. the dollar), and 4) regulation and litigation risks including Canada, US menthol and Natural American Spirit.

Partners Group (Overweight; Price Target: CHF900.00)

Investment Thesis

In our view, the investment case for Partners is attractive given the combination of the business model’s growth and defensive characteristics. We believe the high earnings predictability of the business is unique and creates significant embedded value within the business. We remain constructive on the outlook for growth in the alternative asset management sector, which bodes well for AuM growth for Partners.

Valuation

We derive our target price from our three-stage DCF model, which we believe is an appropriate methodology given the inherent embedded value in the business in view of the long-term contractual nature of the capital commitments made by investors in the underlying fund. We have explicit forecasts for the period FY18 to FY22 and a middle period of four years to FY2026, where we assume c8% per annum growth in EBITDA. Finally, we derive terminal free cash flows based on a terminal growth rate of 2.5%. We use a 7.5% cost of equity. Our Dec-19 TP is CHF 900.

Risks to Rating and Price Target

We believe the key risk for Partners is FX, as around 60% and 30% of revenues are in € and US$, respectively, while € and US$ costs account for only 5% and 20% of total costs, with c50% in CHF. Management has indicated that the proportion of assets raised in € has been steadily decreasing and will continue to do so, as a greater proportion of non-European clients opt for funds in their local currency. Other potential risks would include a slowdown in gross commitments. We also note an inability to invest the gross commitments in attractive opportunities could affect investment performance and money multiple achieved.

Vinci (Overweight; Price Target: €103.00)

Investment Thesis

Vinci is the world leader in construction and concessions, employing more than183,000 people in some 100 countries. We have an OW rating on the stock which we view as a major beneficiary of the buoyant French contracting outlook. The concession portfolio should continue to enjoy robust growth rates, while we think that the market should not overly worry about a potential transaction on ADP, which we estimate could actually be double -digit accretive.

Valuation

We have a SOTP June-19 PT of €103. Key components of our SOTP model are:

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

Concessions: DCF method for the valuation of the concessions, using a WACC of 5.24%, average traffic growth of c. 1.5% p.a. for the toll roads until the end of the concessions and a long-term CPI inflation assumption of 1.5% p.a.

Contracting: An EV/EBIT multiple (8.0x on average) on 2019E EBIT assumptions for each of the contracting divisions.

Risks to Rating and Price Target

The main risks to our rating are, in our view: 1) increasing French bond yields and their impact on our WACC for the DCF valuation of the concession divisions; 2) more severe-than-anticipated austerity cuts and tax hikes; 3) a fallback into a recessionary scenario that would impact the contracting revenues generated to the private sector; 4) higher-than-expected decline in industrial production, which would drive heavy vehicle traffic down, 5) a decline in contracting margins, given Vinci's margins have been fairly resilient over the past six years, and 6) a materially worse macroenvironment in France, which could see spending on infrastructure in particular come in above our expectations. We see upside risks from higher- than-expected toll traffic growth in France and air traffic growth in Portugal and Lyon, as well as stronger-than-expected recovery in the French construction market.

Swiss Re (Overweight; Price Target: CHF120.00)

Investment Thesis

We have an Overweight rating on Swiss Re, which reflects a number of factors:

Swiss Re has an extremely strong capital position, as demonstrated by its SST ratio and also its estimated Solvency II ratio, one of the highest among the reinsurers. We believe this capital strength is a competitive advantage, and should allow the company to return a large proportion of earnings in future periods.

Price declines in natural catastrophe business, which still has relatively attractive margins, are likely to continue to some degree, we believe, as primary insurers retain more and reinsure less, and excess capital continues to weigh on the industry. Despite this, recent indications suggest that the rate decline is slowing, and we believe margins overall remain adequate to deliver a return above Swiss Re’s cost of capital.

Swiss Re has been reducing its exposure to nat cat business and, as such, we believe the business is now becoming more balanced. Overall, losses have remained benign and we believe this positions the company well to return additional capital to shareholders.

We believe Swiss Re’s valuation is attractive relative to peers, as demonstrated by our sum-of-the-parts model.

Valuation

We value Swiss Re using a sum-of-the-parts derived methodology. We value the P&C Re, L&H Re and Corporate Solutions divisions of Swiss Re using a simple PE method, which uses an implied cost of equity of 8.5% for P&C Re, 9.0% for L&H Re and 8.5% for CorSo, and assumes zero terminal growth. We value Life Capital using a 30% premium to its last reported Economic Net Worth. Finally, we deduct $1bn for group item costs. The result is a Dec-19 target price of CHF120.

Swiss Re sum-of-the-parts valuation $ million

	2020E
	Net Income	Multiple	SOTP Value
P&C Re	1,682	11.8x	19,788
L&H Re	904	11.1x	10,041
Corporate Solutions	253	11.8x	2,980
Life Capital	466	1.3 * ENW	5,000
Group Items	(56)	Group Items	(1,000)
Total	3,249	Total USD	36,809
		Total CHF	36,809
		÷ NoSH	282.1
		Per share:	CHF130
		Discount to Dec-19:	CHF120
Source: J.P. Morgan estimates.

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

Risks to Rating and Price Target

The key downside risk is from larger-than-expected nat cat activity, particularly if pricing in the subsequent period remains benign. In the L&H business, some of the biggest exposures relate to sharp changes in mortality/longevity trends; for example, if a large global pandemic were to occur. The company also has significant financial market risk from its investment portfolio. A prolonged period of very low interest rates would also act as a headwind for investment returns.

Vivendi (Overweight; Price Target: €42.00)

We believe that Music is the best content story in media. UMG more than underpins VIV’s share price and in our view has the potential to drive multiples of upside as subscriptions drive revenue growth, margin expansion and a re-rating. C+ is delivering on its turnaround plan and a strategic discount could close in the coming months with the resolution of Italian disputes and creation of an industrial partnership with MSET and TI, while Paddington 2 should showcase VIV’s content strategy. Vivendi is one of our key Overweight picks in European media.

Valuation

Our Dec-18 SOTP-based valuation remains €42 / share. We value UMG at €44.3bn, we have a C+ group valuation of €3.9bn and we mark to market its listed investments.

Vivendi SOTP

€ million, year-end 31 December

	Stake		EV/EBITDA		EV/NOPAT	Value
	%	2018E	2019E	2018E	2019E	€m
UMG	100%	48.2	39.0	68.2	54.7	44,323
French Pay TV	100%					-7
Poland	51%					721
Overseas	100%					467
Africa	100%					1,889
Vietnam / Other	49%					70
Studio Canal	100%					856
FTA	100%					-60
C+ Group		6.2	5.7	15.2	14.0	3,936
Havas		10.2	8.8	18.2	15.5	2,852
Gameloft		31.5	21.5	339.5	87.1	265
Village		8.8	5.7	-23.7	-25.7	131
New Initiatives		-0.8	-2.2	-0.9	-1.5	50
Corporate		9.8	9.8	14.8	14.8	-1,077
EV		29.9	24.5	29.0	23.2	50,479
Mediaset	28.8%					845
Telefonica	1.0%					369
Telecom Italia	17.0%					1,880
Banijay	31.4%					130
Vevo	49.4%					95
Spotify	4.0%					862
Value of stakes						4,181
Tax assets						630
Pension and other provisions						-1,807
Less net Debt						-636
Mediaset settlement						-600
Equity Value						52,247
No Shares						1,257
Value per share (€)						42

Source: J.P. Morgan estimates.

Risks to Rating and Price Target

The following risks could prevent the stock from achieving our target price and rating: 1) better/worse-than-expected operating performance at Canal+ Group and UMG; 2) value-accretive/dilutive acquisitions; and 3) higher/lower-than- expected cash return to shareholders.

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
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GN Store Nord (Overweight; Price Target: Dkr311.00)

Investment Thesis

Our Overweight recommendation reflects our belief that the current valuation, which is at a discount to the wider sector (and also to Hearing Aid peers), does not reflect the above-average growth. We believe that as the company delivers on its medium-term guidance, the rating will expand.

Valuation

Our December 2019 price target is DKK311. Our price target uses our standard simple mean of PE, EV/EBITDA and DCF valuations. We use a 2019E PER multiple of 25x and an EV/EBITDA multiple of 16x, reflecting ~25% premium to the wider sector reflecting the superior growth profile, and supported by our SOP analysis.

Risks to Rating and Price Target

Risks include a slowing hearing aid market, increased competition leading to additional pricing pressure, poor product launches, product recalls, consumer downturn (particularly for the mobile business) and a pullback in corporate IT spending for the CC&O business.

ArcelorMittal (Overweight; Price Target: €36.50)

Investment Thesis

We are Overweight on ArcelorMittal primarily on the basis of attractive valuation, and its relatively higher US exposure, which we believe will be advantageous in the context of US tariffs leading to higher domestic prices. We also see positive potential benefits from the integration of Ilva.

Valuation

We apply a target EV/EBITDA multiple of 5.0x to our EBITDA estimate for the 12m to Dec’20E to derive a Dec’19 PT. The target multiple is in-line with its historical through-the-cycle average.

Risks to Rating and Price Target

Downside risks include:

Lower-than-expected steel prices.

An deterioration in domestic Chinese steel demand expectations or a failure in China’s efforts to reduce domestic steelmaking capacity, leading to more competition from imports in MT’s core European and US markets.

M&A – MT has launched a bid to acquire the ILVA steel plant from the Italian Government; while we see positive strategic benefits from the transaction, a failure to control capex or opex costs could lead to lower than expected earnings in the mid to longer-term.

Underperformance against cost-cutting targets.

Royal Dutch Shell A (Overweight; Price Target: 2,800p)

Investment Thesis

We have an Overweight rating on Shell (RDSA and RDSB). The company's industrial model has strengthened markedly post the acquisition of BG. The compromise has been a heavy debt burden, poor dividend coverage and elevated capex intensity that has been slower to fall than that of peers. Our Overweight rating reflects: 1) An attractive risk/reward on its long-term upstream portfolio to 2025. Shell offers upper quartile returns (average IRR 18%) from a pipeline that is diversified and operator exposed. 2) On the front foot on Energy Transition. Amongst the majors, Shell is best placed within our ESG framework and ranks top quartile on our metric of carbon footprint vs energy diversification. 3) Capital spend to remain on track. Shell should continue to stay within its target MT capex budget through 2025 even with higher proportionate allocation of new energies spend, and 4) Competitive cash breakevens to 2022 despite a rising call on capex. Shell’s premium CFFO/boe from 2019/20 growth projects relative to the sector helps underpin strong free-cashflow generation which is key in creating the headroom to absorb a rising capex call. Shell’s O&G business should move more firmly into ‘cash cow’ mode from 2020, underpinned by a positive trending of upstream execution, technology-led capital

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