13th June 2017 TMT Ubisoft Convincing press conference at E3 2017, you can play both fundamentals and speculation Price EUR47.61 Fair Value EUR52.5 vs. EUR42 (+10%) BUY Bloomberg UBI.FP The group strengthened our confidence on its four AAA established franchises for the current FY Reuters UBIP.PA 2017-18, and especially convinced us about the potential of its new sequels Assassin’s Creed Origins 12-month High / Low (EUR) 50.5 / 29.0 and Far Cry 5. Finally, the company unveiled its secret new AAA IP for the next fiscal year (a Market Cap (EURm) 5,385 multiplayer pirate game for Fall 2018, named Skull & Bones). Now that UBI’s business model offers Ev (BG Estimates) (EURm) 5,300 visibility, we are comfortable with valuing the company over the next 2 fiscal years. We maintain our Avg. 6m daily volume (000) 269.6 3y EPS CAGR 41.6% Buy rating and raise our FV from EUR42 to EUR52.5. We also update our estimated price range in the event of a takeover bid from EUR45-60 to EUR53-67 (at least the midpoint if Vivendi is the buyer). 1 M 3 M 6 M 31/12/16 ANALYSIS Absolute perf. -0.5% 29.1% 50.4% 40.9% Softw.& Comp. -3.1% 5.3% 16.4% 12.2% • A convincing lineup: Ubisoft began its conference with Mario + Rabidds Kingdom Battle (a turn- SVS DJ Stoxx 600 -2.3% 3.6% 9.3% 7.0% based tactical adventure game, exclusive to the Nintendo Switch on 29th August), followed by impressive presentations of the fresh new Assassin’s Creed Origins (set in Ancient Egypt, this new YEnd Mar. (EURm) 03/17 03/18e 03/19e 03/20e opus starts from its action-adventure roots and is now a genuine action-RPG, available on 27th Sales 1,460 1,697 2,088 2,295 October for PS4, Xbox One and PC) and Far Cry 5 (this FPS action-adventure game is set in Hope % change 16.3% 23.0% 10.0% County, Montana, available on 27th February 2018 for PS4, Xbox One and PC). Ubisoft also EBITDA 650 892 1,099 1,224 showed The Crew 2 (the new sequel of the online racing game, early 2018 for PS4, Xbox One and EBIT 200.9 230.0 410.0 535.1 PC), South Park: The Fractured but Whole (RPG game, available on 17th October for PS4, Xbox % change 14.5% 78.3% 30.5% One and PC) and Just Dance 2018 (in October on PS4, Xbox One, Wii U and Switch). This year, the Net income 137.5 158.4 296.2 390.1 surprises of the show were the new IP called Skull & Bones (a multiplayer pirate game set in 1721 % change 15.2% 87.1% 31.7% on the Indian Ocean, developed by Ubisoft Singapore and clearly inspired by Assassin’s Creed Black Flag, expected in Fall 2018 on PS4, Xbox One and PC) and the come back of Beyond Good & Evil 2 03/17 03/18e 03/19e 03/20e (a famous action-adventure game from Michel Ancel, beyond FY 2018-19). More anecdotically, Operating margin 13.8 13.6 19.6 23.3 Ubisoft announced Transference: Enter the Home of a Mind (a new VR game letting players Net margin 7.4 9.3 14.2 17.0 virtually visit the construction of someone else's mind, available in Spring 2018 for PlayStation VR, ROE 9.5 12.3 18.7 19.7 HTC Vive, and Oculus Rift and playable in non-VR form on PS4, Xbox One and PC), Starlink: Battle ROCE 11.1 13.4 24.8 32.6 for Atlas (an action-adventure game, it allow players to create a team of starfighter pilots and Gearing 7.2 -6.6 -24.2 -39.4 control them in battle against the enemy, available in Fall 2018 for PS4, Xbox One and Switch) and the mobile game South Park: Phone Destroyer (a free-to-play real-time strategy game from South (EUR) 03/17 03/18e 03/19e 03/20e Park Digital Studios, with PvP battles, expected later this year). EPS 1.15 1.32 2.48 3.26 % change - 15.2% 87.1% 31.7% • FY 2017-18 guidance validated: ~EUR1,700m in sales i.e. +16% Y/Y (four AAA games) and non-IFRS P/E 41.4x 36.0x 19.2x 14.6x EBIT of ~EUR270m (margin of 15.9%, -40bp). This should be achieved thanks to 1) four AAA games FCF yield (%) NM 2.9% 5.3% 6.9% (Assassin's Creed Origins, Far Cry 5, The Crew 2 and South Park: The Fractured but Whole), 2) Dividends (EUR) 0.00 0.00 0.00 0.00 another sharp increase in highly profitable recurring revenues from the digital segment (>50% of Div yield (%) NM NM NM NM FY sales), and 3) further strong growth for the back catalogue (>40% of total sales). EV/Sales 3.7x 3.1x 2.4x 2.0x • We view 2018-19 as a de-risked fiscal year: in the coming years, we expect the group to launch EV/EBITDA 8.4x 5.9x 4.5x 3.8x less new IPs (less risky), to focus more on players’ engagement (more back-catalogue i.e. more EV/EBIT 27.2x 23.0x 12.2x 8.6x visibility) and additional contents on existing franchises (more digital revenue i.e. more recurring sales). The group is pursuing its transformation towards its mid-term plan, namely a less-risky and even more profitable profile (UBI is ahead of schedule in its digital move). Its mid-term plan is: 1) FY 2018-19 revenue of EUR 2.1bn (+23% Y/Y) based on three established franchises and the new IP Skull & Bones, >55% of total sales coming from digital (with >25% from player recurring investment); 2) non-IFRS EBIT of ~EUR440m i.e. a margin of 21% (+510bp Y/Y); and 3) FCF generation of EUR300m. As a result, thanks to its digital revenue and back catalogue, Ubisoft only needs to sell ~28m units of its games to meet its targets. • Speculation surrounding the stock remains intact: At the end of April, Reuters reported that Vivendi wants to accelerate acquisitions in video games and advertising this year. Now that the media group has made an offer to acquire Group Bolloré’s stake in Havas, Ubisoft could be the next target. All the more so as citing sources close to the matter, the French newspaper Le Figaro recently reported Vivendi (who had already declared its intention to float a minority stake in Universal Music Group) is now looking to float no more than 10-20% of the music unit (according to our calculations, this would bring Vivendi between EUR2bn and EUR4bn). Vivendi currently holds 27.00% of the capital and 24.54% of the voting rights of Ubisoft. This compares with 13.2% and 19.4% respectively for the Guillemot family. Vivendi could virtually cross the 30% threshold after the acquisition of double voting rights some time in November 2017 (the trigger level for a mandatory bid) but it could opt for bearer shares to remain below this level. As a result, we consider Vivendi controls the timing of any potential transaction on Ubisoft. We see the ideal r r window of opportunity later on this year or early next year. VALUATION • We maintain our Buy recommendation. Now that UBI’s business model offers more visibility (a more recurring and profitable profile), we are comfortable with valuing the company over the next two years (vs. only the current year previously). As a result, we raise our FV from EUR42 to EUR52.5. This is based on UBI's historical multiples from the past two console cycles (incl. a 20% premium related to the digital segment) that we applied to both FY 2017-18 and 2018-19. In the event of a takeover bid, we update our estimated price range from EUR45-60 to EUR53-67 (the midpoint is a minimum if Vivendi wants to avoid counterbids as far as possible). • YTD the sector is performing extremely well: our sample of video game publishers is growing by almost 50% on average YTD (Activision Blizzard +57%, Take-Two 50% and EA +38%) vs. Ubisoft +41%. As a result, we see good momentum for UBI share price even excluding speculation. NEXT CATALYSTS • UBI’s investor day: today at 8:00am in Los Angeles (local time), i.e. 5pm (Paris time). • UBI’s investor day: on 28th June at 9:00am in Montreuil (local time). BG estimates for the next two fiscal years EURm Sales Y/Y Non-IFRS Non-IFRS Non-IFRS IFRS Non-IFRS IFRS EPS Fully growth op. op. net net EPS (fd) (fd) diluted income margin income income shares (m) FY 2016-17 (reported) 1,459.9 4.7% 237.7 16.3% 174.3 107.8 1.46 0.90 119.7 FY 2017-18e (BG ests.) 1,697.2 16.3% 270.0 15.9% 198.4 158.4 1.66 1.32 119.7 FY 2018-19e (BG ests.) 2,087.5 23.0% 440.0 21.1% 326.2 296.2 2.73 2.47 119.7 Source: Bryan, Garnier & Co ests. Worth noting: • Both fiscal years are based on reasonable assumptions regarding units expected to be sold per game. • For FY 2017-18: the company expects an increase in its gross margin, offset by more R&D efforts. Indeed, Ubisoft has factored in what it expects to be a very competitive environment (we believe the group is more comfortable since the postponement of Take Two’s Red Dead redemption 2).