Equity Research Midcaps Ubisoft Media / France www.exanebnpparibas-equities.com Update - Midcaps Stock vs Sector Neutral EPS revisions 03/07 03/08e 03/09e 03/10e Sector vs Market Neutral Revised 0.42 0.77 1.32 1.95 Previous 0.42 0.70 1.15 1.67 % change - 10 15 17 Price (29 November 2007) EUR58.6 30 November 2007 Target price EUR57.0 (-3%) Market cap./free float (EURbn) 2.7/1.8 EV (EURbn) 2.6 12-month high/low (EUR) 58.4/22.0 Reuters/Bloomberg UBIP.PA/UBI FP CAC mid 100 7,694.5 Risk rating B Per share data (EUR) 03/07 03/08e 03/09e 03/10e EPS restated 0.42 0.77 1.32 1.95 EPS reported 0.89 1.76 1.59 2.04 EPS (IBES) 0.95 1.27 1.95 1.86 CFPS 5.90 6.47 7.17 8.23 Net dividend 0.00 0.00 0.00 0.00 Stockmarket ratios* 03/07 03/08e 03/09e 03/10e P/E (x) 57.0 76.1 44.5 30.0 P/E rel.sbf 120 (%) 313.5 449.7 329.2 252.6 P/CF (x) 4.1 9.1 8.2 7.1 P/BV (x) 2.1 4.4 4.0 3.5 Net yield (%) 0.0 0.0 0.0 0.0 EV/Sales (x) 1.3 3.0 2.5 2.2 EV/EBITDA (x) 3.4 8.2 6.7 5.5 EV/EBIT (x) 27.2 39.9 24.9 17.3 * Yearly average price for FY ended 03/07 P&L highlights (EURm) 03/07 03/08e 03/09e 03/10e Sales 680 850 1,003 1,123 Restated EBIT 33.4 63.9 101 140 Attrib. net profit (adj.) 18.6 36.6 63.0 94.2 Performance (%) 1w 1m 3m 12m Absolute 4 (2) 21 132 Rel. Media 1 5 31 146 Rel. CAC mid 100 1 7 26 124 Price relative to CAC mid 100 60 50 Roadshow feedback: exciting industry trends and substantial leverage on costs We held a roadshow with Ubisoft s CFO and IR this week The outlook for the company is very positive, thanks to the strong current and future market growth, and potential for margin upside, reflecting the leverage on overheads and R&D. We still think FY07/08e guidance could be raised The success of the Assassin's Creed game could contribute to guidance being raised. Management expected 3 million units of this game to be sold by fiscal year end but 4 million now seems within reach, validating our EUR850m sales estimate (versus official guidance of EUR825m). New FY08/09 financial targets in January 2008 with Q3 07/08 sales We do not expect the targets to materially differ from the current consensus view, with sales of around EUR1bn and a 12% EBIT margin. EPS raised by 13%, target price upped by EUR57, Neutral rating maintained We have raised our sales expectations slightly but have hiked our margins expectations more substantially, as Ubisoft appears to have significant cost leverage, thanks to its tight control of central costs and the high percentage of sales made with internal IPs. We have raised our DCF-based target price to EUR57 from EUR51 per share as a result of the aforementioned changes. Electronic Arts presence in Ubisoft s capital acts as a support for the stock. 40 30 20 10 0 2005 2006 2007 Ubi Soft Relative to CAC mid 100 Source: DATASTREAM Source: Datastream Stephane Nieres-Tavernier Paris: +33 1 42 99 51 28 stephane.nieres-tavernier@exanebnpparibas.com Stephane Nieres-Tavernier Luc Bojanowski Fabien El Haik Mourad Lahmidi Stéphane Soussan Stéphane Sumar Please refer to important disclosures at the end of this report.
A quick recap of strong H1 07/08 results Ubisoft issued solid H1 07/08 results on 20 November (see focus dated 21 November). Both new titles and back-catalogue items worked very well. As a result, sales were up 52% at EUR261m. Ubisoft recorded positive H1 net results for the first time in history (usually seasonality puts H1 in the red, although the editor is profitable on a full-year basis). The gross margin gained 5 percentage points due to the increasing weight of new generation sales (higher price points). These results underline Ubisoft's strong operating leverage on its cost structure: both R&D costs (31% of sales vs 41% a year ago) and SG&A (29.5% vs 37.4%) grew less quickly than sales. Overall, the H1 EBIT margin was 3.5% before stock option costs and before a litigation-related one-off. Table 1: Detailed P&L as at 30 September under French GAAP H1 06/07 H1 06/07 H1 07/08 EURm As released Restated As released Sales 172.1 172.1 261.4 % growth 13 13 52 Cost of sales (64.8) (69.9) (93.8) As a % of sales 37.7 40.6 35.9 Gross profit 107.3 102.2 167.6 As a % of sales 62.3 59.4 64.1 R&D expenses (71.4) (71.4) (81.3) As a % of sales 41.5 41.5 31.1 SGA expenses (69.5) (64.4) (77.2) As a % of sales 40.4 37.4 29.5 Current op. income/(loss) bef. stock options (33.6) (33.6) 9.1 Margin (%) (19.5) (19.5) 3.5 Stock options (1.7) (1.7) (4.0) Current op. income/(loss) after stock options (35.3) (35.3) 5.1 Other operating revenues and expenses 0.0 0.0 7.5 Operating income/(loss) (35.3) (35.3) 12.5 Margin (%) (20.5) (20.5) 4.8 Net financial income/(expense) 3.3 3.3 12.6 Share of profit/(loss) of associates (Gameloft) 2.8 2.8 0.0 Net income tax/benefit 8.7 8.7 (9.3) Goodwill amortisation 0.0 0.0 0.0 Discontinued operations 0.0 0.0 14.8 Net income/(loss) (20.5) (20.5) 30.6 Source: Company, Exane BNP Paribas estimates If the company only matches its FY guidance, the H2 07/08 EBIT margin would show no improvement on last year (whereas H1 margins increased by 23 percentage points vs last year). 2 Ubisoft
Ubisoft s business model and characteristics provide significant leverage on costs Chart 1: Sales and margin history 900 10.1% 10.3% 12% 800 700 600 500 400 300 200 8.4% 0.9% 7.4% 3.2% 3.1% 8.4% 8.2% 2.3% 6.8% 7.7% 7.6% 4.0% 0.3% 6.2% 6.3% 0.1% (2.2%) 5.6% 4.9% 7.5% 10% 8% 6% 4% 2% 0% -2% -4% 100 0-100 (7.2%) (7.3%) 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 04/05 IFRS 05/06 06/07 07/08e -6% -8% -10% Sales EBIT EBIT US GAAP EBIT margin Restated EBIT margin Source: Company, Exane BNP Paribas estimates Sales and production structure lead to margin leverage Typically Ubisoft generates 75% of its sales with its own studios products, 5-6% from distribution and 15% from publishing. It has a very strong internal production workforce (second on a global basis after Electronic Arts with about 2,650 people). It also has fewer games based on licences. This helps explain Ubisoft's steady margin increase over recent years. The cost structure provides leverage in the upward phase of the cycle The gross margin on new generation titles is about 75% (high price points), 56% on older generation titles and 40-45% on back-catalogue games. The average gross margin target is 66.5%. The structure's costs have been increasing slower than sales in recent years. While sales have risen by about 50% in two years, overhead costs (ex-r&d) were up 5% last year and then about 8% this year. 3 Ubisoft
Table 2: Margin construction for FY07/08e Based on guidance Exane BNP Paribas estimates Year to end-march - EURm FY07/08e FY07/08e Sales 825.0 850.0 Cost of sales (276.4) (284.8) As a % of sales 33.5 (33.5) Gross profit 548.6 565.3 Gross margin (%) 66.5 66.5 R&D (251.6) (250.0) As a % of sales 30.5 29.4 Marketing (115.5) (119) As a % of sales 14.0 14.0 Margin on direct costs 181.5 196.3 As a % of sales 22.0 23.1 Overheads / structure (107.3) (108.3) As a % of sales 13.0 12.7 SG&A (222.8) (227.3) As a % of sales 27.0 26.7 EBIT before stock options 74.3 87.9 EBIT margin (%) 9.0 10.3 Source: Company, Exane BNP Paribas estimates Strong operating performance: we raise our forecasts Potential upgrade to FY07/08e guidance We believe there is still upside potential to the current FY07/08 guidance. The title Assassin s Creed seems to be selling particularly well. An additional 1 million shipped on Assassin (4 million vs 3 million) would mean a further EUR30m in sales. Including Beowulf, which has been less successful than anticipated, would lead to a net EUR25m contribution to the current EUR825m guidance. Management has stressed that the EUR825m guidance, with 9% EBIT margin, has been maintained despite the dollar slide which is expected to have a negative effect of roughly EUR35m impact on FY07/08e sales. Without the dollar's slide, the underlying EBIT margin would have been about 100 bp higher i.e. 10%. Management might need to reconsider the geographical dispersion of its production force one day (even the Canadian dollar gained against the US dollar). Q4 07/08 will see the release of EndWar, Brother in Arms, FarCry2, Haze, Rainbow Six Vegas 2 and some new casual games plus the PC and DS versions of Assassin s Creed. This quarter has the potential to be extremely strong. With 6% sales growth expected in Q3, and at company s guidance for the full year, Q4 sales should be up 19% to EUR234m. Medium-term operating margin leverage Next year s catalogue and FY08/09e guidance will be unveiled in January 2008 at the time of the Q3 07/08e sales release. Over the last few months, many titles have slipped from the current fiscal year to the next, as was the case with Splinter Cell. For the next fiscal year there will also be three new brands, including Air Combat (Tom Clancy). There could also be Prince of Persia (no new title in the last two years), a sport title around Shawn White (both snowboarder and skateboarder) and a title based on the Driver franchise. Management appears confident it can generate FY08/09e sales of close to EUR1bn, with an 11-12% EBIT margin (although this is not yet official guidance, we must wait until January for that). For FY09/10e, with again about 20% sales growth expected (for Ubisoft), a 13-14% EBIT margin now looks attainable. 4 Ubisoft
Change to our forecasts: +13% on average on EPS We have left our sales forecast for FY07/08 unchanged, but have raised our profitability expectations from 9.5% to 10.3%. Note that the restated EBIT margin that appears in the Exane BNP Paribas financial highlights factors in the net impact of R&D accounting. As the company is investing more than it is depreciating (at the moment and also next year) there is a positive impact on apparent margins that we feel must be underlined. The difference between investment and depreciation will be EUR15m in FY07/08e and about EUR10m in FY08/09e. We have raised our sales growth forecast for FY08/09 and FY09/10e by 2% and our margin estimates by 120bp and 230bp respectively in order to better integrate the strong leverage on sales that the company enjoys (see the section on margin leverage). We have raised our EPS estimates by 13% on average for the 2007-10 period. Table 3: Summary of changes to estimates After change Before change % change EURm 07/08e 08/09e 09/10e 07/08e 08/09e 09/10e 07/08e 08/09e 09/10e Sales 850.0 1,003.0 1,123.4 850.0 986.0 1,104.3 0 2 2 % growth 25 18 12 25 16 12 EBIT (before stock-based compensation) 87.9 119.7 150.2 80.5 105.7 122.6 9 13 23 EBIT margin 10.3 11.9 13.4 9.5 10.7 11.1 (before stock- based compensation) (%) EBIT 87.4 110.7 140.1 75.7 98.8 114.9 16 12 22 EBIT margin % 10.3 11.0 12.5 8.9 10.0 10.4 Net profit 36.9 64.0 95.1 33.8 56.0 81.5 9 14 17 Source: Company, Exane BNP Paribas estimates The following table details our new estimates. Table 4: Detailed P&L EURm 2005/06 2006/07 2007/08e 2008/09e 2009/10e Sales 547.1 680.3 850.0 1,003.0 1,123.4 % change 2.7 24.4 0.0 0.0 0.0 Cost of sales (183.9) (227.9) (284.8) (336.0) (376.3) As a % of sales (33.6) (33.5) (33.5) (33.5) (33.5) Gross margin 363.1 452.4 565.3 667.0 747.0 As a % of sales 66.4 66.5 66.5 66.5 66.5 R&D (170.4) (233.0) (250.0) (274.8) (305.7) As a % of sales 31.1 34.2 29.4 27.4 27.2 SG&A (187.2) (181.1) (227.3) (272.4) (291.1) As a % of sales 34.2 26.6 26.7 27.2 25.9 EBIT before stock options 4.1 38.2 87.9 119.7 150.2 EBIT margin (%) 0.7 5.6 10.3 11.9 13.4 EBIT (1.4) 34.6 79.9 110.7 140.1 EBIT margin (%) (0.3) 5.1 9.4 11.0 12.5 Net profit 11.9 40.6 80.9 73.1 94.8 Source: Company, Exane BNP Paribas estimates 5 Ubisoft
Table 5: Detailed cash flow table (year to end-march) EURm 2005/06 2006/07 2007/08e 2008/09e 2009/10e Net debt (cash) beginning of period 84.0 65.3 (55.0) (92.2) (132.4) Net profit 11.9 40.6 80.9 73.1 93.8 Depreciation & amortisation 160.7 232.7 248.6 274.8 305.7 Other (15.6) (1.5) (14.5) 0.0 0.0 Cash flow 157.1 271.8 315.1 347.9 399.5 Capex (201.9) (244.4) (280.0) (297.0) (314.0) o.w. Internal R&D (130.5) (166.5) (190.0) (205.0) (220.0) o.w. External R&D (54.5) (61.0) (70.0) (70.0) (70.0) o.w. other capex (16.9) (18.0) (20.0) (22.0) (24.0) Working capital requirement (5.9) 7.4 (12.0) (10.7) (8.4) Free cash flow (50.7) 34.8 23.0 40.2 77.1 Financial investment (5.9) 7.4 (12.0) (10.7) (8.4) Capital increase 41.7 106.6 3.9 0.0 0.0 Other 31.8 4.0 25.3 0.0 0.0 Change in net debt 17.0 152.7 40.2 29.5 68.6 Net debt (cash) end of period 65.3 (55.0) (92.2) (132.4) (209.5) Source: Company, Exane BNP Paribas estimates How can Ubisoft generate EBIT of over 15%? Ubisoft typically sells a multitude of titles in quantities ranging from 1-2 million and a handful of titles which sell about 3 million by new release. In order to generate EBIT margins in excess of 14-15%, Ubisoft would need more stronger selling IPs, notably titles selling more than 5-6 million units. This would lower costs (on a relative basis) and, more notably, the relative cost of R&D and associated marketing. These multi-million selling hits explain part of the margin gap with Electronic Arts and Activision. For the moment, Assassin s Creed seems to be this kind of multi-million selling title. It could sell 4 million this year and 5-6 million on its total lifespan. Some Clancy titles could also be classified in this category. Ubisoft needs to release more than one or two titles with this kind of potential every year, however, in order to reach the 15% EBIT margin threshold. This may not occur before the top of this cycle (possibly around 2011/12). 6 Ubisoft
Growth opportunities: natural market growth, download and M&A Video games market growth The market is expected to by 20% this year in dollar terms (about 17% in euro terms). It is sustained by new generation consoles, including handheld. Next year will see at least 10% market growth. Table 6: Game Software market (USA, Europe, Australia and New Zealand) USDbn 2005 2006 % change 2007e % change Consoles next generation 0.2 2.4 1,076 6.8 189 Consoles old generation 8.7 7.1 (19) 4.6 (35) Handheld next generation 1.3 3.0 131 4.5 50 Handheld old generation 1.3 0.9 (29) 0.5 (46) PC 3.1 2.8 (10) 3.1 11 Total game software market 14.6 16.1 11 19.4 20 Source: Company- revenue from advertising and online/downloading not included Despite lower-than-expected console sales (not only on the PS3 but even on the 360), sales are very robust due to very strong tie-ratios on the Xbox 360 (4.7 games sold per console in circulation) while the tie-ratio on the PS3 is a bit more normal at 3.3 per console. The release of the successful DS helped mitigate the impact of the decline in sales of old generation games (Xbox and especially PS2) before the Xbox 360 and PS3 were launched. The handheld market is now much bigger than the PC market (1.5x). For the DS alone, sales rose 140% for the first nine months of 2007 in Europe and 102% for the North America. It is unclear at this stage if 2011 will see the end of the current cycle. Ubisoft s management seems to believe that there could be a decoupling between the living room consoles cycle and the handheld one, possibly with new DS and PSP, as early as 2009. Download (new maps, add-ons, features + potentially direct distribution, one-day) Downloads are still a small part of the business, but activity is growing quickly (1% of total Ubisoft sales last year, expected to grow to 2% this current year i.e. growing from EUR5m to about EUR15m). This includes advertising revenues, arcade games (as sold on Xbox live), add-ons, but not downloads of physical games. Ubisoft s management says the activity could represent as much as 5% of sales in two to three years. Advertising, in particular, will grow as specialised companies are trying to take a hold on this market by signing exclusive deals with editors and then selling advertising space to announcers. Ubisoft s games are a bit less easy for selling advertising spaces due to their nature (weak presence so far in sports, historical games like Brother in Arms / Assassins / Prince of Persia). Ubisoft is following Microsoft's recently-launched experiment of selling old titles (now unavailable on retailers shelves) online at reduced prices. By undercutting retailers, Ubisoft's margins are only slightly below those of selling a product full price in stores. 7 Ubisoft
M&A: interest despite internal production focus Management appears on the lookout for acquisition opportunities. It will have a EUR90m net cash position by year-end. It is interested by Asia (it already bought a small DS-focused Japanese studio a few weeks ago) and MMORPG (online multi-player games, such as the very successful World of Warcraft). All types and sizes of acquisition targets (from EUR2m to EUR200m) are looked at by Ubisoft, although management does not seem particularly keen on making large acquisitions. IPs could be bought (like the Driver one bought from Infogrammes a year ago). It is also looking at CGI studios, where it has already made some investments (including a Canadian studio specialised in these issues). 8 Ubisoft
Valuation: 4% upside from current levels DCF valuation raised to EUR57 The valuation of a video game editor is inherently volatile, the impact of the cycle being amplified by the high operating leverage. Depending on the medium-term margin outlook, i.e., on the group s ability to release multimillion games (and once again the attainable EBIT margin level is key for assessing the stock s potential) a range of valuation would be EUR52-EUR63. We discount cash flows at a WACC of 8.7% (4.0% risk-free rate, risk premium 4.67%, beta 1.2). In our DCF valuation we model explicit forecasts with two top of the cycles until 2017 and two low EBIT margin points of respectively 7% (about 100bp higher than the 2006/07 EBIT margin) and 10% as the exit EBIT margin (10% will be reached in the second year of a four/five-year cycle, so this looks credible as a medium cycle profitability target). Table 7: Detailed DCF calculation EURm 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e Sales 850.0 1,003.0 1,123.4 1,235.7 1,334.6 1,401.3 1,541.4 1,926.8 2,312.1 2,658.9 2,924.8 % change 25 18 12 10 8 5 10 25 20 15 10 EBITDA 336.6 394.6 455.9 510.9 527.2 522.8 640.8 810.2 1,009.9 1,165.2 1,164.1 As a % of sales 39.6 39.3 40.6 41.3 39.5 37.3 41.6 42.1 43.7 43.8 39.8 Depreciation (248.6) (274.8) (305.7) (337.8) (375.7) (424.8) (502.1) (579.0) (663.1) (739.8) (871.6) As a % of sales (29.3) (27.4) (27.2) (27.3) (28.2) (30.3) (32.6) (30.1) (28.7) (27.8) (29.8) EBIT 87.9 119.7 150.2 173.0 151.5 98.1 138.7 231.2 346.8 425.4 292.5 EBIT margin (%) 10.3 11.9 13.4 14.0 11.4 7.0 9.0 12.0 15.0 16.0 10.0 PAT 58.0 79.0 99.1 114.2 100.0 64.7 91.6 152.6 228.9 280.8 193.0 Cash flow 306.7 353.9 404.8 452.0 475.7 489.5 593.6 731.6 892.0 1,020.6 1,064.6 Capex (280.0) (297.0) (314.0) (336.0) (373.0) (440.5) (520.6) (595.9) (682.1) (754.9) (864.4) As a % of sales (32.9) (29.6) (28.0) (27.2) (27.9) (31.4) (33.8) (30.9) (29.5) (28.4) (29.6) Capex internal R&D (190.0) (205.0) (220.0) (240.0) (275.0) (330.0) (396.0) (455.4) (523.7) (576.1) (662.5) Capex - External (70.0) (70.0) (70.0) (70.0) (70.0) (80.5) (92.6) (106.5) (122.4) (140.8) (161.9) Capex - Other (20.0) (22.0) (24.0) (26.0) (28.0) (30.0) (32.0) (34.0) (36.0) (38.0) (40.0) Financial investment (15.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Change in WCR (12.0) (10.7) (8.4) (7.9) (6.9) (4.7) (9.8) (27.0) (27.0) (24.3) (18.6) Free cash flows (0.4) 46.1 82.4 108.2 95.8 44.3 63.3 108.8 182.8 241.4 181.6 % change (91) (12,093) 79 31 (11) (54) 43 72 68 32 (25) Present FCF (0.4) 43.4 70.8 84.9 68.7 29.0 37.8 59.4 91.2 109.9 75.5 Terminal growth (%) 5.0% Terminal value 4527 Present terminal value 1932 Sum of PV of FCF 681 - Net debt (92) - Value of minorities 0 + Financial assets 85 = Equity value (in EURm) 2790 / Shares outstanding 46 = Implied value per share EUR61 Cash impact of stock options (in EURm) 28 / Shares outstanding fully diluted 49 = Implied value per share EUR57 Source: Exane BNP Paribas estimates We also include EUR85m of financial assets in our valuation: about EUR30m-35m in Ubisoft stock (held by Calyon but still owned by Ubisoft) and about EUR50m in Gameloft shares (also held by Calyon in another stock swap). We have raised our target price to EUR57 per share versus EUR51 previously, as a direct result of the estimate upgrades detailed earlier. This implies upside of 9% from current stock price. 9 Ubisoft
We have conducted a sensitivity analysis on long-term growth and EBITA margins (i.e., from 2017). Table 8: Sensitivity analysis long-term growth and EBITA margin LT EBITA margin/beta 8% 9% 10% 11% 12% 1.0 61 67 73 79 85 1.1 54 59 64 69 74 1.2 49 53 57 62 66 1.3 44 48 52 56 60 1.4 41 44 48 51 54 Source: Exane BNP Paribas estimates Peers comparison The stock is trading on around 20x FY08/09e EBIT (26x when we restate the EBIT from the discrepancy between R&D spent in the cash flow and R&D expensed in the P&L) compared to a US average of 15.5x FY08e EBIT. Ubisoft has stronger earnings momentum than Electronic Arts at the moment. On the other hand, Activision revised its Q3 and FY guidance upwards after the Thanksgiving week end on the back of healthy Guitar Hero sales and the stock price gained more than 20%. Table 9: Peers' multiples as of 28 November 2007 Stock price Market P/E (x) EV/EBIT (x) EV/Sales (x) Currency Cap. (m) 07/08e 08/09e 07/08e 08/09e 07/08e 08/09e Infogrames (EUR) 0.14 169 NA NA NA NA 0.82 0.77 Ubisoft (R&D restated) (EUR) 55.1 2,514 79.0 47.8 39.9 26.1 2.80 2.35 Ubisoft (as published) 55.1 2,514 50.1 36.2 27.5 19.9 2.80 2.35 Average Europe videogames 79.0 47.8 39.9 26.1 1.81 1.56 Electronic Arts (USD) 57.3 17,674 52.3 28.9 54.0 21.5 3.73 2.98 Activision (USD) 22.6 6,331 28.9 25.1 16.3 14.6 2.27 2.12 THQ (USD) 24.7 1,583 32.4 18.4 36.1 10.5 1.13 0.95 Average USA 37.9 24.1 35.5 15.5 2.38 2.02 Source: Exane BNP Paribas estimates, consensus JCF Conclusion: Neutral maintained despite bullish comments Despite pretty exciting comments from management during this roadshow, we maintain our Neutral on Ubisoft for valuation reasons. We believe it will be a little more difficult for the stock to Outperform in future months if management reveals FY08/09 targets that are only in-line with consensus expectations. On a sector relative basis, Ubisoft seems poised to continue gaining market share from its competitors. 10 Ubisoft
Rating definitions Stock Rating (vs Sector) Outperform: The stock is expected to outperform the industry large-cap coverage universe over a 12-month investment horizon. Neutral: The stock is expected to perform in line with the industry large-cap coverage universe over a 12-month investment horizon. Underperform: The stock is expected to underperform the industry large-cap coverage universe over a 12-month investment horizon. Sector Rating (vs Market) Outperform: The sector is expected to outperform the DJ STOXX50 over a 12-month investment horizon. Neutral: The sector is expected to perform in line with the DJ STOXX50 over a 12-month investment horizon. Underperform: The sector is expected to underperform the DJ STOXX50 over a 12-month investment horizon. Key ideas BUY: The stock is expected to deliver an absolute return in excess of 30% over the next two years. Exane BNP Paribas Key Ideas Buy List comprises selected stocks that meet this criterion. Distribution of Exane BNP Paribas equity recommendations As at 10/10/2007 Exane BNP Paribas covered 424 stocks. The stocks that, for regulatory reasons, are not accorded a rating by Exane BNP Paribas are excluded from these statistics. For regulatory reasons, our ratings of Outperform, Neutral and Underperform correspond respectively to Buy, Hold and Sell; the underlying signification is, however, different as our ratings are relative to the sector. 43% of stocks covered by Exane BNP Paribas were rated Outperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 4% of stocks with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 12% of the companies accorded this rating*. 39% of stocks covered by Exane BNP Paribas were rated Neutral. During the last 12 months, Exane acted as distributor for BNP Paribas on the 5% of stocks with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 11% of the companies accorded this rating*. 18% of stocks covered by Exane BNP Paribas were rated Underperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 1% of stocks with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 7% of the companies accorded this rating*. * Exane is independent from BNP Paribas. Nevertheless, in order to maintain absolute transparency, we include in this category transactions carried out by BNP Paribas independently from Exane. For the purpose of clarity, we have excluded fixed income transactions carried out by BNP Paribas. Ubisoft historical closing price & target price (as of 29/11/2007) EUR70.00 EUR60.00 EUR50.00 EUR40.00 EUR30.00 EUR20.00 EUR10.00 EUR0.00 11-04 02-05 05-05 08-05 11-05 02-06 05-06 08-06 11-06 02-07 05-07 08-07 Closing price Target price Date Closing price Target price Rating Changes 20/09/2007 EUR44.22 EUR51 Neutral Target price 25/07/2007 EUR43.25 EUR47 Neutral Target price 27/04/2007 EUR36.43 EUR40 Neutral Target price 18/04/2007 EUR37.30 EUR35 Neutral Target price 24/01/2007 EUR27.51 EUR32 Neutral Target price 16/01/2007 EUR29.33 EUR29 Neutral Rating & Target price 07/12/2006 EUR22.00 EUR26.75 Outperform Rating 15/11/2006 EUR25.95 EUR26.75 Neutral Target price 28/04/2006 EUR19.31 EUR18 Neutral Target price 21/02/2006 EUR16.08 EUR16 Neutral Rating & Target price 22/07/2005 EUR22.02 EUR23.5 Outperform Target price 17/06/2005 EUR19.68 EUR21.5 Outperform Target price 21/01/2005 EUR13.95 EUR18 Outperform Rating & Target price 07/01/2005 EUR13.50 EUR15 Neutral Rating & Target price Source: Exane BNP Paribas 11 Ubisoft
Commitment of transparency on potential conflicts of interest Complete disclosures, please see www.exane.com/compliance Exane Pursuant to Directive 2003/125/CE and NASD Rule 2711(h) Questions 1. Investment banking and/or Distribution - Has Exane managed or co-managed in the past 12 months a public offering of securities for the subject company/ies? - Has Exane been acting as distributor for BNP Paribas, when BNP Paribas managed or co-managed in the past 12 months a public offering of securities for the subject company/ies - Has Exane received compensation for investment banking services from the subject company/ies in the past 12 months or expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months? Answers 2. Liquidity provider agreement and market-making - At the date of distribution of this report, does Exane act as a market maker or has Exane signed a liquidity provider agreement with the subject company/ies? YES 3. Corporate links - Does the research analyst principally responsible for the preparation of this report or a member of his/her household serve as an officer, director or advisory board member of the subject company/ies. 4. Analyst's personal interest - Does the research analyst principally responsible for the preparation of this report own a financial interest in the subject company/ies? 5. Significant equity stake - Does Exane own 1% or more of any class of common equity securities of the subject company/ies as of the end of the month immediately preceding the date of publication of the research report or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month? - Does Exane own a stable shareholding in the subject company, above the legal threshold defined in article L 233-7 of the French Commercial Code? 6. Disclosure to Company - Has a copy of this report; with the target price and/or rating removed, been presented to the subject company/ies prior to its distribution, for the sole purpose of verifying the accuracy of factual statements? - Have the conclusions of this report been amended following disclosure to the company/ies and prior to its distribution? 7. Additional material conflicts - Is Exane aware of any additional material conflicts of interest with regard to the distribution of the research? Source: Exane BNP Paribas Exane is independent of BNP Paribas (BNPP) and the agreement between the two companies is structured to guarantee the independence of Exane's research, published under the brandname «Exane BNP Paribas». Nevertheless, to respect a principle of transparency, we separately identify potential conflicts of interest with BNPP regarding the company/(ies) covered by this research document. Potential conflicts of interest: None. Source: BNP Paribas 12 Ubisoft
UBISOFT Price at 29/11/07: EUR 58.6 Stock rating vs Sector: Neutral Target price: EUR 57.0 / - 2.7% Sector rating vs Market: Neutral Media - France Enterprise value (EURm) 2,551 60.0 Mkt cap. / Free float (EURm) 2,698 / 1,843 45.0 3m average volume (EURm) 13.75 Target Price 12-mth high / low (EUR) 58.4 / 22.0 35.0 Performance 1mth 3mths 12mths 25.0 Absolute (2%) 21% 132% Rel. (Sector) 5% 31% 146% 15.0 Rel. (CAC mid 100) 7% 26% 124% Reuters/Bloomberg UBIP.PA / UBI FP Analyst: Stephane Nieres-Tavernier CAGR 1998/2007 2007/2009 EPS restated (*) NC 59% 5.0 CFPS 19% 13% 3.6 Price 6.1*CFPS Relative to CAC mid 100 PER SHARE DATA (EUR) Mar. 98 Mar. 99 Mar. 00 Mar. 01 Mar. 02 Mar. 03 Mar. 04 Mar. 05 Mar. 06 Mar. 07 Mar. 08e Mar. 09e Mar. 10e No of shares year end, basic, (m) 22.240 22.460 33.160 33.160 33.818 35.080 35.165 36.090 38.869 45.397 46.070 46.070 46.070 Average no of shares, diluted, excl. treasury stocks (m) 22.230 23.871 26.721 34.681 35.339 37.419 37.975 39.188 43.432 46.363 48.754 48.679 48.679 EPS reported 0.20 0.28 0.33 0.11 0.24 0.14 (0.26) 0.55 0.31 0.89 1.76 1.59 2.04 EPS restated (0.48) (0.23) 0.15 (0.61) (0.24) 0.14 0.21 0.72 (0.24) 0.42 0.77 1.32 1.95 % change NS 52.7% NS NS 61.0% NS 54.7% 235.4% NS NS 82.5% 70.8% 48.6% CFPS 0.92 1.40 1.80 1.15 2.37 3.30 2.63 3.80 3.22 5.90 6.47 7.17 8.23 Book value (BVPS) (a) 0.9 1.2 8.5 8.8 9.1 8.7 8.4 8.8 9.8 11.5 13.2 14.8 16.8 Net dividend 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 STOCKMARKET RATIOS YEARLY AVERAGE PRICES for end Mar. 98 to Mar. 07 Mar. 02 Mar. 03 Mar. 04 Mar. 05 Mar. 06 Mar. 07 Mar. 08e Mar. 09e Mar. 10e P / E (P/ EPS restated) NC NC 119.0x NC NC 58.9x 44.8x 14.9x NC 57.0x 76.1x 44.5x 30.0x P / E relative to SBF 120 NC NC 526% NC NC 321% 306% 99% NC 314% 450% 329% 253% P / CF 8.3x 8.6x 9.9x 19.1x 7.8x 2.5x 3.6x 2.8x 6.0x 4.1x 9.1x 8.2x 7.1x FCF yield (2.7%) (18.9%) (17.6%) 1.8% (10.7%) 1.9% 11.4% 14.6% (9.3%) 3.5% 0.8% 1.5% 2.9% P / BVPS 8.66x 9.86x 2.09x 2.48x 2.03x 0.94x 1.15x 1.21x 1.97x 2.09x 4.45x 3.97x 3.49x Net yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Payout (0.0%) (0.0%) 0.0% (0.0%) (0.0%) 0.0% 0.0% 0.0% (0.0%) 0.0% 0.0% 0.0% 0.0% EV / Sales 1.97x 2.57x 1.86x 3.09x 2.07x 1.00x 0.90x 0.87x 1.43x 1.33x 3.00x 2.50x 2.17x EV / Restated EBITDA 24.3x 12.2x 8.2x 36.8x 10.1x 4.1x 3.1x 2.8x 5.3x 3.4x 8.2x 6.7x 5.5x EV / Restated EBIT NC 288.5x 58.2x NC 88.2x 14.6x 22.7x 11.4x NC 27.2x 39.9x 24.9x 17.3x EV / OpFCF NC NC NC 49.7x NC 17.9x 8.8x 6.6x NC 27.7x 58.0x 32.3x 19.7x EV / Capital employed (incl. gross goodwill) 4.7x 3.5x 1.9x 2.2x 1.7x 1.0x 1.1x 1.2x 1.9x 2.2x 5.4x 5.0x 4.7x ENTERPRISE VALUE (EURm) 190 340 347 804 764 452 458 466 782 908 2,551 2,511 2,434 Market cap 169 270 449 728 627 285 337 386 750 1,018 2,698 2,698 2,698 + Adjusted net debt 21 71 (94) 87 158 177 124 84 65 (55) (92) (132) (209) + Other liabilities and commitments + Revalued minority interests 1 - Revalued investments 1 2 7 11 20 10 2 4 33 56 56 56 56 P & L HIGHLIGHTS (EURm) Switch to IFRS data from FY ended 03/06 Mar. 01 Mar. 02 Mar. 03 Mar. 04 Mar. 05 Mar. 06 Mar. 07 Mar. 08e Mar. 09e Mar. 10e Sales 96.4 132.6 186.5 259.8 369.0 453.0 508.4 538.0 547.1 680.3 850.0 1,003.0 1,123.4 Restated EBITDA (b) 7.8 28.0 42.6 21.9 75.4 109.9 148.6 164.7 148.8 266.1 312.5 375.5 446.2 Depreciation (14.8) (26.8) (36.6) (41.0) (66.7) (78.9) (128.4) (123.7) (160.7) (232.7) (248.6) (274.8) (305.7) Restated EBIT (b) (*) (7.0) 1.2 6.0 (19.1) 8.7 30.9 20.2 41.0 (12.0) 33.4 63.9 100.7 140.5 Reported operating profit (loss) 8.1 13.4 13.7 7.9 31.0 36.9 1.5 41.4 (1.4) 34.6 87.4 110.7 140.1 Net financial income (charges) (0.6) (2.7) 0.4 (3.1) (10.6) (12.5) (12.1) (11.7) (9.1) 18.0 12.0 0.0 2.0 Affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 19.1 3.1 0.5 0.0 0.0 Other (0.1) 0.2 (0.6) (0.1) 2.2 (6.9) 8.9 0.2 0.0 0.0 14.8 0.0 0.0 Tax (3.0) (4.6) (2.6) 0.3 (9.2) (7.3) (1.4) (2.8) 3.3 (15.2) (33.8) (37.6) (48.3) Minorities 0.0 0.0 0.0 (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Goodwill amortisation 0.0 0.0 (0.0) (1.4) (5.4) (5.5) (6.0) (7.2) - - - - - Net attributable profit reported 4.4 6.3 10.9 3.6 8.0 4.7 (9.0) 20.0 11.9 40.6 80.9 73.1 93.8 Net attributable profit restated (c) (10.7) (6.0) 3.2 (23.4) (14.3) (1.3) 0.7 19.5 (12.1) 18.6 36.6 63.0 94.2 CASH FLOW HIGHLIGHTS (EURm) Mar. 98 Mar. 99 Mar. 00 Mar. 01 Mar. 02 Mar. 03 Mar. 04 Mar. 05 Mar. 06 Mar. 07 Mar. 08e Mar. 09e Mar. 10e EBITDA (reported) 22.9 40.2 50.3 48.9 97.7 115.9 130.0 165.0 159.4 267.3 336.1 385.5 445.8 EBITDA adjustment (b) (15.1) (12.2) (7.8) (27.0) (22.3) (6.0) 18.6 (0.3) (10.6) (1.2) (23.5) (10.0) 0.4 Other items 16.2 12.2 6.9 19.9 27.6 32.5 (36.8) (2.5) (5.0) 3.7 23.5 10.0 (0.4) Change in WCR 0.0 (43.0) (61.8) (18.7) (37.3) (16.3) 40.8 40.0 (5.9) 7.4 (12.0) (10.7) (8.4) Operating cash flow 24.0 (2.8) (12.4) 23.0 65.7 126.1 152.6 202.2 137.9 277.1 324.0 374.8 437.4 Capex (25.0) (41.0) (64.6) (6.8) (113.0) (100.8) (100.7) (131.3) (201.9) (244.4) (280.0) (297.0) (314.0) Operating free cash flow (OpFCF) (1.0) (43.8) (77.0) 16.2 (47.3) 25.3 51.9 70.9 (64.0) 32.7 44.0 77.8 123.4 Net financial items + tax paid (3.6) (7.3) (2.2) (2.8) (19.8) (19.8) (13.5) (14.5) (5.8) 2.8 (21.8) (37.6) (46.3) Free cash flow (4.6) (51.1) (79.2) 13.4 (67.1) 5.4 38.4 56.4 (69.8) 35.6 22.2 40.2 77.1 Net financial investments 0.0 0.7 (1.4) (187.3) (11.4) 2.6 (6.9) (20.0) 18.5 (25.0) 10.3 0.0 0.0 Other (16.9) 0.5 2.5 (15.2) 0.5 (28.7) 22.2 3.2 28.2 3.2 0.5 0.0 0.0 Capital increase (decrease) 0.0 0.0 243.9 7.4 7.2 1.4 0.0 0.0 41.7 106.6 3.9 0.0 0.0 Dividends paid 0.0 Increase (decrease) in net financial debt 21.5 49.8 (165.8) 181.7 70.7 19.3 (53.7) (39.6) (18.6) (120.3) (36.9) (40.2) (77.1) Cash flow, group share 20 33 47 39 83 123 98 148 138 273 314 348 399 BALANCE SHEET HIGHLIGHTS (EURm) Mar. 98 Mar. 99 Mar. 00 Mar. 01 Mar. 02 Mar. 03 Mar. 04 Mar. 05 Mar. 06 Mar. 07 Mar. 08e Mar. 09e Mar. 10e Fixed operating assets, incl. gross goodwill 43 57 79 248 289 298 283 306 336 367 413 435 444 WCR (2) 41 102 121 158 175 134 94 78 47 60 70 79 Capital employed, incl. gross goodwill 41 98 182 369 447 473 417 400 415 414 473 506 522 Shareholders' funds, group share 20 28 283 293 309 305 294 319 381 522 607 680 773 Minorities 0 0 0 0 0 0 0 0 0 0 0 0 0 Provisions/ Other liabilities 0 0 1 0 0 1 2 1 1 3 3 3 3 Net financial debt (cash) 21 71 (94) 87 158 177 124 84 65 (55) (92) (132) (209) FINANCIAL RATIOS (%) Mar. 98 Mar. 99 Mar. 00 Mar. 01 Mar. 02 Mar. 03 Mar. 04 Mar. 05 Mar. 06 Mar. 07 Mar. 08e Mar. 09e Mar. 10e Sales (% change) NS 37.6% 40.7% 39.3% 42.0% 22.8% 12.3% 5.8% 1.7% 24.4% 24.9% 18.0% 12.0% Organic sales growth 0.0% 37.6% 40.7% 39.3% 42.0% 22.8% 12.3% 5.8% 2.7% 24.4% 24.9% 18.0% 12.0% Restated EBIT (% change) (*) NS NS 405.6% NS NS 257.3% (34.9%) 103.6% NS NS 91.4% 57.6% 39.5% Restated attributable net profit (% change) (*) NS 44.1% NS NS 59.4% NS 57.2% 299.9% NS NS 96.4% 72.5% 49.4% Personnel costs / Sales 26.9% 27.0% 27.3% 28.1% 25.2% 21.9% 22.8% 25.2% 25.7% 25.1% 24.8% 24.1% 23.2% Restated EBITDA margin 8.1% 21.1% 22.8% 8.4% 20.4% 24.3% 29.2% 30.6% 27.2% 39.1% 36.8% 37.4% 39.7% Restated EBIT margin (7.2%) 0.9% 3.2% (7.3%) 2.3% 6.8% 4.0% 7.6% (2.2%) 4.9% 7.5% 10.0% 12.5% Tax rate 40.1% 42.6% 19.1% NC 40.8% 41.6% NC 9.5% NC 28.9% 34.0% 34.0% 34.0% Net margin 4.6% 4.7% 5.9% 1.4% 2.2% 1.0% (1.8%) 3.7% 2.2% 6.0% 9.5% 7.3% 8.3% Capex / Sales 25.9% 30.9% 34.6% 2.6% 30.6% 22.3% 19.8% 24.4% 36.9% 35.9% 32.9% 29.6% 28.0% OpFCF / Sales (1.0%) (33.0%) (41.3%) 6.2% (12.8%) 5.6% 10.2% 13.2% (11.7%) 4.8% 5.2% 7.8% 11.0% WCR / Sales (2.5%) 30.6% 54.9% 46.6% 42.9% 38.6% 26.3% 17.4% 14.3% 7.0% 7.0% 7.0% 7.0% Capital employed (excl. gross goodwill) / Sales 4.2% 36.5% 60.3% 51.4% 46.5% 41.7% 28.9% 20.4% 18.4% 10.7% 15.5% 16.4% 16.1% ROE (before goodwill) (54.8%) (21.7%) 1.1% (7.5%) (2.9%) 1.4% 2.3% 8.4% (3.2%) 3.6% 6.0% 9.3% 12.2% Gearing 110% 259% (33%) 30% 51% 58% 42% 26% 17% (11%) (15%) (19%) (27%) EBITDA / Financial charges 12.0x 10.5x NC 7.0x 7.1x 15.1x 23.6x 14.1x 17.5x 47.6x 312.5x NC NC Adjusted financial debt / EBITDA 2.7x 2.5x NC 4.0x 2.1x 1.6x 0.8x 0.5x 0.4x NC NC NC NC ROCE, excl. gross goodwill NS 1.4% 4.3% NS 3.0% 9.6% 33.8% (8.1%) 32.5% 32.1% 40.5% 51.2% ROCE, incl. gross goodwill (10.3%) 0.7% 2.7% NS 1.1% 3.8% 9.3% (2.0%) 5.7% 8.9% 13.1% 17.7% WACC 9.5% 9.5% 9.2% 8.4% 7.1% 9.0% 8.5% 8.8% 9.1% 9.1% 9.1% Average number of employees 1,034 1,563 1,744 1,869 1,931 2,130 2,550 3,121 3,688 3,984 4,084 4,184 (a) Intangibles: EUR341.40m, or EUR7 per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost (c) adj.for capital gains losses, imp.charges, capitalized R&D, exceptional restructuring, (*) also adjusted for goodwill for pre IFRS years 13 Ubisoft
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