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Summary WPP reported Q2 25 / H1 25 results in line with the profit warning announced on July 9th (WPP: WPP reduces FY 25 guidance on macro and weak net new business). Q2 25 organic sales declined -5.8% (vs cons -5.6%) with all key divisions down. The Q2 performance implies c.-600bp underperformance vs peers. H1 25 Adj. EBIT came at GBP412m (-2% vs cons.) which implies 8.2% adj. EBIT margin (-330bp YOY). Margin deterioration reflects organic sales decline coupled with severance action at WPP Media. Management reiterates the recently lowered 2025 guidance (-3/-5% OSG, Adj. EBIT margin -60/-185bp YoY incl. -10bp of FX). Group is now looking at GBP1.1bn to 1.2bn adj operating cash flow before WC vs GBP1.4bn initially and cons at GBP1.2bn. Guidance implies a slight improvement of OSG trend in the second part of the year at c.-3.5/-4.0% vs -4.3% in H1 25. Sequential improvement could prove challenging given poor underlying momentum with existing clients (c.-4% in Q2 25), ongoing WPP Media reorganization (long term gain but likely short term pain) and potential disruption related to CEO succession. The board has decided to cut by half interim dividend to p7.5 to give incoming CEO financial flexibility. Conference call to be held at 10.30am CET. We expect a negative share price on the interim div cut and adj operating cash flow guidance cut. More details on Q2 25 / H1 25 results Q2 25 net revenue declined -12.5% YoY at GBP2,544m. The net revenue decline is explained by -5.8% organic sales decline, -3.5% FX and -3.3% MandA. All key divisions declined in Q2 with a notable deterioration for WPP Media which is down -4.7 LFL in Q2. All geographies declined on an organic basis with a notable decline in Europe and UK (-6.5% LFL). H1 25 Adj. EBIT declined -36% YoY at GBP 412m (-2% vs cons.) which implies 8.2% adj. EBIT margin -330bp. Margin deterioration reflects organic sales decline coupled with severance action at WPP Media. More details on recently...
WPP Plc
WPP shares fell c.-19% today, after the company issued its second profit warning this year. The company cites tougher macro conditions (c.50% of the cut) and lower net new business (the other c.50%). Other Ad Agencies are due to report over the next few weeks, but we suspect this warning is mostly driven by company-specific factors. We don''t see this warning as a ''kitchen sinking'' ahead of a new CEO''s arrival but rather a reflection of weak positioning relative to peers and soft underlying trends. Considering recent new business loss, CEO succession and potential disruption related to WPP Media reorganization, it is difficult to see a meaningful recovery before H2 26. We reduce our estimates by c.-11% and lower our TP to 460p (from 570p). Maintain Neutral. Much weaker Q2 25 / H1 25 momentum WPP announced that Q2 25 net revenue is expected to decline -5.5/-6.0% on an organic basis (c.-250/-300bp miss vs initial guidance) due to the challenging economic backdrop (c.150-200bp impact) and one-off effects (c.100bp impact). Trends to remain soft in H2, leading to c.-10% FY 25 adj. EBIT cut Taking into account lower organic sales (-3/-5%), FX impact (-2% expected) and lower adj. EBIT margin (-300/-350bp), the group is now targeting adj. EBIT between GBP1,340m and GBP1,500m, which comes in c.10% below previous estimates. At the mid-point, the FY guidance implies c.-3.7% organic sales decline in H2 vs c.-4.3% in H1 and adj. EBIT margin up +60bp in H2 vs -340bp in H1 25. Reality check, not ''kitchen sinking'' exercise Given a new CEO is expected to be announced soon, the company could be wanting to rebase estimates and acknowledge all the challenges at once. But we think the situation may remain challenging for some time and further rebasing of margins and cash return could be required when new CEO arrives.
Advertising Agency stocks have underperformed the market YTD (c.-18% vs. MSCI World), impacted by macro uncertainties, soft Q1 25 (Top 4 Ad Agencies'' organic net revenue -0.5% yoy), and persistent Gen AI threat. Yet despite macro uncertainties, media spend has been resilient and is on track to grow +6% yoy in 2025. We expect org. sales growth trends for top Ad Agencies to improve by Q3''25 and believe Gen AI concerns are overstated. But is important to remain selective - we prefer Publicis (+) given its solid competitive advantages, good business win momentum and potential upside to FY''25 guidance. We also remain positive on OMC (+) and IPG (+) as current valuation multiples don''t seem to reflect the potential long-term benefits of the combined entity. Underlying media spend remains resilient, leaving upside potential for Ad Agencies'' OSG Given the recent trade war de-escalation, supportive comments from top marketers during Q1''25 and our top 100 marketers spending tracker, we see c.100bps upside potential for Ad Agencies'' OSG for 2025. Gen AI concerns continue to be overstated The sector continues to suffer from headlines about disruptive Gen AI tools. While Gen AI will certainly impact the way agencies approach creative services, we don''t think it will put them at risk: (1) the Gen AI tools of big tech companies mostly address SMEs rather than large marketers; (2) large marketers don''t want to depend on a single platform and require consistent messaging across the entire media landscape; (3) Ad Agencies have developed their own Gen AI tools, offering ''premium AI-assisted creativity'' that delivers differentiated, personalized content at scale. Publicis (+) remains our top pick; we also see attractive long-term benefits at OMC/IPG (+) We see Publicis as best positioned given strong support from new business wins, favourable business mix, differentiated go-to-market offering, unique connected ID and efficient organization. See our PUB report...
WPP PUB PUB OMC OMC IPG IPG HAVAS
As expected, WPP Q1 25 organic sales momentum was soft (-2.7%), impacted by business loss, persistent weakness in China and decrease in project-based work. However, the group reiterated its FY 25 guidance, as the initial projection was conservative and management has not seen any shift in client spending so far. After a soft H1, management expects a rebound in H2 helped by better net new business impact, improvement at GroupM and benefits from cost efficiencies. We reduce 2025 estimates by c.-3% to reflect stronger FX headwinds on topline and adj. EBIT margin. While valuation multiples look attractive relative to peers, we think the soft underlying momentum and weaker positioning rel. to peers will likely limit investor interest in the near term. Remain Neutral; TP to 600p. Trends remained soft in Q1 25, with OSG down -2.7% Q1 25 organic sales declined -2.7% due to negative net new business at GroupM, pressure on project-based work and softness for the PR business. Trends in the US improved (flat from -1.2% in Q4), but this was more than offset by weakness in UK (-5.5%) and continental Europe (-4.5%). Group reiterates its FY 25 guidance at cc, but FX is now a stronger headwind The group reiterated its FY 25 guidance (-2%/0% OSG, flat margin excl. FX) as the initial projection was conservative and management has not seen any shift in client spending so far. However, FX deteriorated, and the impact is now expected at -2% on topline and -20bp on adj. EBIT margin. Since Q2 organic trend is expected to be in line with Q1 (c.-2.7%), the FY guidance implies c.-1%/+3% OSG in H2 helped by better net new business. QandA main takeaways (1) Clients'' tone: no shift in spending so far. Of WPP''s top 25 clients, 5 are directly exposed to tariffs, 10 indirectly exposed, and those 10 would have minor impact. (2) GroupM: happy with progress made on the 5 key priorities; Infosum addition will strengthen GroupM data offering and competitive positioning. (3) Pitch...
Ad Agency stocks have underperformed YTD (-8% rel. to MSCI) due to macro uncertainties, particularly in the US, and somewhat disappointing guidance (notably WPP). While Ad Agencies are today better equipped to navigate a macro downturn than a few years ago, a US recession would still have a negative impact. We have reduced our organic sales growth (OSG) estimates by c.50bps across the board to reflect slowing US momentum. In a bear scenario, we see on average c.5% downside to Cons EPS. This would still put the sector on an attractive 10x PE on average. We continue to favour Publicis (+), which has the most levers to pull in a challenging environment. We cut Ad Agencies OSG estimates by c.50bps to reflect a slowing macro in the US We''ve cut OSG estimates for top ad agencies by 50bps, now expecting +1.4% growth (vs +2.6% in 2024). This aligns with the mid-point of company guidance and consensus estimates. Historically, the top 4 agencies'' performance has correlated with global GDP growth, suggesting the +1.5% OSG expectation already implies lower global GDP growth at c.+1.9% (vs consensus +3.2%). We expect Q1 25 trend to be soft, with progressive recovery in subsequent quarters We model +0.6% OSG on average for the top 4 Ad Agencies in Q1 25 (vs +1.8% in Q4 24). Publicis should deliver a solid performance with +4.5% OSG, vs +3.7% for OMC (+2.4% on net basis). WPP''s and IPG''s org. net revenue should further decline (c.-3%), impacted by account loss. Publicis (+) remains our top pick; we also see attractive long-term benefits for OMC/IPG (+) Despite its relatively high exposure to the US market, we see Publicis as best positioned to navigate a potential economic downturn in ''25 due to strong support from new business wins, favourable business mix, differentiated go-to-market, unique connected ID and efficient organization. We are also positive on Omnicom and Interpublic (both +) as we expect attractive long-term benefits for the combined entity while...
We have adjusted our estimates as we adjusted our quarterly forecasts for 2025. We do not consider the changes to be material; our rating is unchanged.
Q4 24 miss and underwhelming guidance for 2025 sent WPP shares down c.-15%. Despite important progress in past years (simplification, cost reduction, investment in tech/Data/AI), WPP is still underperforming peers. Given the consolidation in the industry and its relatively weaker positioning, WPP might need to implement more drastic changes or risk being left behind by the other two leaders. We keep a Neutral rating and reduce our TP to GBP 700 (from GBP 830). Q4 24 weaker than expected with OSG -2.3% vs cons. +0.1% Q4 24 net revenue declined -6.8% YoY, of which -2.3% was on an organic basis (-550bp vs peers). All regions saw a sequential deterioration vs Q3, with particular softness in the UK (-5.2%) and Row (-4.9%) on high comp base. GroupM (Media business) grew +2.3% but it was offset by a -6.6% decline for Creative and Others and c.-5.3% decline for PR. Despite weak topline, FY24 Adj. EBIT margin was better than expected at 15.0% (+20bp YoY, +50bp YoY in H2 24) thanks to cost efficiencies. FY24 FCF was better than expected at GBP738m (+20% vs cons.) helped by WC inflow. FY 25 guidance implies adj. EPS -5% YoY Management expects 2025 organic sales to decline between -2% and 0% (vs cons. +2%, peers'' guidance +2.3%). Group highlights a neutral net new business effect (negative in H1, positive in H2), soft client discretionary spending and macro uncertainties. Despite weak topline trend, management expects flat adj. EBIT margin with operating deleverage, increased AI investment, and FGS global headwind offset by cost efficiencies. Guidance implies c. 84p Adj. EPS (-5% YoY). Estimates down -6% on weaker OSG and margin We cut our 2025 and 2026 EPS estimates by c.-6% reflecting a -3% cut in net revenue (-1% OSG vs +2% before) and higher financial charges. Our estimates cut along with a higher discount in our relative to peers approach lead us to revise our TP to GBP700 (from GBP830).
BNPP Exane take . According to Adage article, Kimberly-Clark has wrapped its massive global creative and media review, splitting responsibilities between the four major holdcos (PUB, WPP, OMC, IPG). . Kimberly-Clark, who used to work with hundreds of Ad agencies, decided to consolidate duties among top four holdcos as part of the company''s ''Powering Care strategy''. . Omnicom appears to be the biggest net winner in picking up global media duties outside of the US. Based on Adage datacenter, it could represent c. USD500m billings. . The review is positive for WPP with significant gain on Creative (notably from Accenture Song) more than offsetting the loss of Media duties outside of the US (to OMC). . It is also positive for IPG that nabbed creative duties for family care and feminine care brands. After a very soft 9m 24, net new business momentum continues to improve for IPG which is encouraging. . The review is slightly positive for Publicis who picked up the Canada account. As a reminder, Publicis gained K-C Media Duties for the US market in September 2023. . The review is negative for other Ad agencies that used to work with Kimberly Clark. The list includes Accenture (Droga 5), Mischief, VaynerMedia and Quality Meats. . As discussed in recent report (AGENCIES: Navigating through an uncertain world), there are others high profile accounts under review including: Mars Inc (WPP Incumbent), Merck (IPG incumbent), USAA (Publicis incumbent). News: . Kimberly-Clark has wrapped its massive global creative and media review, splitting responsibilities between Interpublic Group of Cos., Omnicom Group, Publicis Groupe and WPP. . The review, designed to consolidate the company''s agency roster, was a part of the company''s Powering Care strategy. K-C previously had hundreds of agency partners globally, according to sources. It was not immediately clear whether K-C would continue to work with any previous agency partners. . IPG, Omnicom, Publicis and...
WPP PUB PUB OMC OMC IPG IPG
Considering macro uncertainties, the fast-evolving nature of the industry (notably due to Gen AI tools), the incoming Trump administration, and the OMC/IPG merger, 2025 could be a year of surprises for the Agencies sector. Overall, we expect operating performances to remain in line with cons. (c.+3% OSG, slight margin improvement) with sustained outperformance from Publicis and Omnicom. We upgrade IPG to O/P from U/P on deal valuation. We expect OMC''s full share bid to go through by end 2025. Despite ST integration and execution risks, our scenario analysis suggests as much as 50% upside if synergies beat and multiples expand. For 2025, we prefer Publicis (+) and OMC/IPG (+); we are Neutral on WPP and Havas on lower OSG. Our main predictions for 2025 (1) We see challenges as well as opportunities under Trump''s 2nd term; (2) IPG/OMC deal to be finalized by end-2025 with potential dis-synergies seen in H2''25; (3) further bolt-on acquisitions likely, but no major consolidation after OMC/IPG deal; (4) organic sales trend stable at c.+3% with Publicis outperforming by c.+350bps; (5) further roll-out of Gen AI but no major disruption. Publicis remains our preferred stock We expect the group to post strong low double-digit adj. EBIT growth in 2025, helped by its business mix, differentiated connected media ecosystem, increasing exposure to fast-growing segments and slight margin improvement. We see upside potential via Sapient and cash return. OMC/IPG combined market cap only reflects integration risks and no benefits Even if we include substantial dis-synergies and integration risks, we still find significant upside for the new company given increased scale, improved identification solutions and cost synergies. Neutral on WPP and Havas given lower OSG momentum Both WPP''s and Havas''s performances should improve sequentially but are likely to remain below peers'' given weaker positioning and greater exposure to challenging areas and/or geographies.
WPP Q3 24 trend improved sequentially (OSG +0.5% vs -1.0% in H1 24) helped by better momentum for Media business. We expect further improvement of OSG momentum in the next quarters, but the magnitude could be limited given neutral net new business effect entering 2025, persistent weakness in China and a limited rebound to tech client spending. Operating leverage and cost reduction should support margin improvement in the next few years, but this should be partly offset by sustained reinvestment in our view. We think WPP operating performance should remain below Publicis/OMC. In those conditions, we think current valuation multiples discount (c.-10% on EV/EBIT 25) is justified. We revise our estimates by c.+1% (better OSG, FX) and price target to p790 (vs p750). Stay Neutral. Q3 24 OSG better than expected thanks to Media (GroupM) Q3 24 OSG came at +0.5% (c.+70bp beat vs cons.) helped by improving trends at GroupM (+4.8% OSG from a relative low base). Creativity remained soft with -3.1% organic sales decline impacted by contract loss (Pfizer). PR division OSG was stable with growth at FGS offset by Burson. Group reiterates FY 24 guidance: OSG -1.0%/0.0%, 0/+20bp margin improvement (incl. FX) The FY guidance implies Q4 24 organic sales between -2% and +1%. We think the difference between the low and high ends of guidance mostly depends on the macro environment, momentum in China and tech client spending. Post revision, we model +0.2% in Q4 24 and -0.4% for the FY. We assume +16bp adj. EBIT margin improvement to 14.9%. Further improvement in 2025 but the recovery will likely be incremental Management is encouraged by recent business wins (notably Amazon media EU/APAC) but recognizes the net new business impact for 2025 is neutral at the moment. 2025 Headline EBIT margin should benefit from cost reduction, but this should be offset by FGS Global disposal (c.-20bp) and FX headwind (c.-10bp at current rate). Post revision, we model +1.5% OSG and...
WPP^ (WPP, Buy at 774p) - Q3 update shows signs of improvement
WPP^ (WPP, Buy at 786p) - Q3 update preview - a return to form?
Despite improved business models, c.3% underlying organic sales growth and resilient margins, Ad Agencies continue to trade at a material discount to the market and Media sector. Investors continue to put Agencies in the ''cyclical'' bucket and fear a potential recession in the US might derail growth momentum. We argue that top agencies are in a better position to face any potential economic slowdown. We continue to favour Publicis (+) and Omnicom (+) and cut IPG to Underperform. Agencies in better position to face potential economic downturn Agencies have been impacted by fears of recession in the US. In their latest macro outlook, BNPP M360 economists expect the US economy to experience a soft landing rather than a recession, while GDP growth should progressively accelerate in the eurozone. Given revenue diversification from new services (data, DBT, retail Media, etc.), the focus on large brands (less exposed to macro cycle than SMEs) and variabilization of cost base (reduction in non-staff costs) in recent years, we argue top agencies are in a better position to face any potential economic slowdown than in the past. We expect stable trends for top agencies organic sales in Q3 with +3% growth We model c.+3% organic sales growth for top agencies in Q3 2024 (in line with Q2 24) but growth divergence should remain, with Publicis/Omnicom (5% OSG) outperforming IPG/WPP (0%/+1%). Publicis and Omnicom remain our top picks while we turn more cautious on IPG (cut to U/P) We continue to favour Publicis and Omnicom as we expect both to maintain solid outperformance supported by organization structure, investment in platform and focus on fast-growing segments (notably commerce). We lower IPG to Underperform (from Neutral) on poor business win momentum, persistent weakness at specialist agencies and risk of pressure on mid-term adj. EBITA margin. Also see INTERPUBLIC: Challenging road ahead published today.
WPP^ (WPP, Buy at 683p) - Hard yards
WPP''s Q2 24 trends improved sequentially (OSG -0.5% vs -1.6% in Q1 24) but remained weak relative to peers (-470bp on OSG). Given challenges in China, uncertain macro and adverse FX moves, the group revised down its guidance (c.-3% on adj. EBIT). We continue to think WPP is going in the right direction but that its key strategic initiatives will take time to bear fruit and come with execution risks. We reduce our estimates by c.-1% on average and our TP to GBp720 (from GBp750). We maintain our Neutral rating. FY guidance cut (c.-3% on Adj. EBIT) due to China weakness, uncertain macro and FX headwind WPP now expects organic sales between -1% and 0% (vs 0% to +1% before). This implies -1% to +1% organic sales in H2 24, well behind peers. Considering soft net new business wins in H1, persistent weakness in China and no evidence that tech client spending will rebound, we model -0.1% in H2. Including FX impact, we now expect margin up +10-30bp (vs +20-40bp before). Disposal of FGS Global on attractive multiple but it could be a drag on mid-term OSG WPP announced the disposal of its 50% stake in FGS Global for GBP604m. The transaction allows WPP to crystallize the value of the asset on attractive multiples (c.19x EV/EBITDA 2024 vs 6.4x for WPP) and reduces financial leverage to 1.6x excl. leases. On the other hand, WPP is parting with a fast-growing asset (c.+30bp OSG contribution) generating high margin (+50bp above group level). The transaction should be neutral on 2025 EPS with lower net profit offset by lower financial expenses (debt repayment) and lower minorities. Conf call key highlights (1) Key variables for OSG guidance are China, macro and Tech clients. (2) Group is on track to deliver 60% of the GBP125m annual savings in 2024 (vs 40-50% before). This allows the company to reiterate margin guidance excl. FX despite lower OSG. (3) China to be down double digit for the FY 24 after c.20% in H1. (4) Tech clients to be stable for the FY 24 after...
WPP^ (WPP, Buy at 717p) - Interim results and disposal
WPP^ (WPP, Buy at 750p) - Interim results preview
Media sector report - Several positive indicators from latest Bellwether report
WPP FUTR EBQ PEBB ITV
Ad agencies underperformed the market in Q2 24 (-8% rel. MSCI World), impacted by macro uncertainties, soft momentum for consulting services and lack of rebound in tech clients'' spending. We remain positive on the sector, but we think it is important to be selective and favour companies with differentiated assets (data, tech, e-com), good exposure to fast-growing segments (Retail Media, CTV), efficient platform organization and solid balance sheets. In this note we investigate the Retail Media opportunities for agencies. We keep our preference for PUB and OMC in the sector. PUB/OMC appear best positioned to benefit from Retail Media (RM) trend Retail Media (c.9% of total ad spend in 2023) remains among the fastest-growing channels (c.+15% growth pa 2023-2026) adding a net c.+40bp growth to global ad spend p.a. While all top agencies are exposed to RM through their Media activities, we think Publicis (through Epsilon, CitrusAd, Profitero) and Omnicom (through Flywheel) are the best positioned to benefit from this trend as they have acquired specific capabilities to address the segment. Both companies should see c.20-40bp boost to organic sales growth (OSG) driven by Retail Media. This is not to say IPG or WPP won''t benefit as well; in fact, both have recently announced account win or partnerships with retailers. We could still see major growth divergence in Q2 between PUB/OMC and IPG/WPP While we expect top agencies'' OSG to improve to +2.7% in Q224 vs +2.2% in Q124, there should still be a major gap between PUB/OMC (4.5% OSG) and IPG/WPP (2% OSG). Given recent business win momentum, trend could persist in the next quarters. Near term uncertainties likely to affect share price performance for IPG/WPP Apart from slower OSG, IPG and WPP also faced near term uncertainties from the renewal of two key accounts-Amazon Media (managed by IPG) and Unilever Media (by WPP). While we assume both companies will retain those contracts, we believe the...
WPP^ (WPP, Buy at 739p) - And the award goes to...
Media sector comment - Advertising spend outlook - GroupM Global forecasts
WPP PEBB EBQ
Virgin Money UK^ (VMUK, Hold at 215p) - H1 trading in line but headwinds anticipated in H2
WPP UTL VMUK
WPP''s Q1 24 organic sales momentum was soft (-1.6%, c.-500bps vs. peers) given weakness from tech clients, specialist agencies, China and negative ''net new business''. The group reiterated its FY 24 guidance (0/+1% OSG, +20/+40bps headline EBIT margin excl. FX), which implies a sequential acceleration in the next few quarters. Right now, we think the mid-point of the guidance looks achievable. We continue to think WPP is going in the right direction with its key strategic initiatives, which should help the company to be better positioned and improve margin/FCF conversion in the mid- to long term. That said, the reorganisation is far from over and brings potential execution risks during the implementation process. We remain Neutral with a new TP of 790p (from 780p). Mid-point of FY 24 guidance looks achievable Considering soft Q1 24, no rebound in sight for tech clients'' spending and persistent weakness in China, we think the mid-point of the guidance looks achievable (we model +0.4%). There could be upside potential through tech client spending recovery and/or stronger net new business wins. Conference call main takeaways (1) Tech client organic sales were -9.5% on flat comp base. Mgt. sees sequential improvement and even growth as the comp base is easier and existing clients increase spending. (2) China recovery was more challenging than expected due to macro and client loss. Q2 expected to remain mostly in line with Q1 (c.-15%). (3) Q2 OSG should improve sequentially with better trends for tech clients partly offset by weakness in specialist agencies and China. (4) Headline margin improvement (+20/+40bps for the FY) will be mostly H2-weighted given higher savings and operating leverage in H2. Estimates largely unchanged with lower OSG and margin offset by FX Slightly lower organic sales momentum for 2024 (+0.4% vs +0.6% before), reflecting softer Q1 24 and persistent weakness in China, as well as slightly lower margin (15.0% vs. 15.1%) are...
Zinc Media WPP^ (ZIN, NR, CNP at 78p) - Strong full year results
WPP Plc Zinc Media Group plc
WPP^ (WPP, Buy at 804p) - In line Q1 results
1Q figures look 'ok'; very slightly below consensus, though we see no material catalysts for forecast/view changes. Call is at 930am. ADD - challenging macros remain a risk, but we assume conditions improve from here, with some help from easier comps. While WPP must still prove internal progress fr
WPP^ (WPP, Buy at 762p) - Q1 results preview
We are increasingly positive on the Agency sector given improving macro, increasing complexity of the media landscape, higher exposure to fast-growing segments, benefits of GenAI on productivity, solid FCF conversion and decent shareholder returns. With organic sales growth returning 3% in the mid-term, we see no reason for the sector to continue trading at a 40% discount to the market. We maintain our preference for Publicis (EUR120 TP) and upgrade Omnicom to Outperform (USD115 TP) given solid business wins, Flywheel acquisition benefits, upside on margin and more active MandA approach. Growth momentum to accelerate by H2 2024, Publicis to continue outperforming peers With improved macro environment and annualisation of tech clients'' spending reduction, we expect agencies'' top-line momentum to accelerate in the next few quarters and finish 2024 on c. +3% momentum. Publicis should outperform peers in 2024 (c. +200-250bp) while Omnicom should catch up with Publicis in the second part of the year. FCF conversion to recover and support high cash returns and active MandA After two years of soft FCF conversion (c. 32% in 2022 and 46% in 2023), we expect a return toward 60-70% in the next few years thanks to improved margin and normalisation of working cap change. This should help agencies maintain high returns to shareholders and active MandA. Increased confidence in GenAI is a net positive for the sector, PUB appears best positioned There have been various presentations and announcements on GenAI capabilities this year (Core AI at Publicis, Open WPP, IPG Engine, Omni Assist). From what we have seen, Publicis appears to have the biggest competitive advantage on the GenAI thematic given its access to first-party data (Epsilon), AI expertise (Sapient) and centralised structure (country model) which should allow efficient deployment across the organisation. At the moment, we assume GenAI tools to have a limited impact on top and bottom line, but we see...
What happened? Accenture released soft Q2 FY 24 with group''s net revenue flat at cc (vs cons. +0.7%) of which -3% at cc for the consulting business and c.+3% growth at cc for Managed services. Looking at geography, the global Accenture business was flat in the US, down -2% in EMEA and up +6% in Growth markets. By client segment, soft performance for Communications, Media and Tech (-7%) and financial services (-6%) were offset by growth for Health and Public service (+10%), and Resources (+4%). Accenture lowered its FY 24 guidance net revenue from +2/+5% to +1/+3% (vs cons.) while also lowering the op margin (non-GAAP) guide from 15.5-15.7% to 15.5% (consensus was 15.6% and BNPP at 15.7%). It is unclear if the new FY guide embeds an uplift in MandA contribution from the current 2%+ guidance, which would imply a greater organic downgrade. Q3 rev guidance of -1% to +3% is lower than the +3.7% consensus. This also suggests that it is possible we have not yet seen a bottoming of growth, which could come in FQ3 (although we believe the 0% in FQ2, down from 1% in FQ1, will be the bottom). Using the mid-point of Q3, Accenture is implying 5-6% c/c growth in Q4 to reach the mid-point of the new FY guide. For more detail please see Stefan''s first take on Accenture Q2 (ACCENTURE: 2Q''24 FIRST TAKE: Near term still weak, but acceleration set to begin) BNPP Exane View: Accenture weak consulting performance is a negative read across for digital business transformation segment of advertising agencies. Among top Agencies, Publicis is the most exposed to the DBT segment through Sapient (c.17% of group net revenue in 2023). While the read across is negative, it is important to note that Publicis has guided for negative OSG in calendar Q1 24 for Sapient (we model -2%) but improving vs Q4 trend (-4%). Also, we only assume +3% OSG for Sapient in 2024. If we were to assume +2% (in line with the mid-point of Accenture guidance), this would have c.20bp impact on group...
WPP^ (WPP, Buy at 724p) - All to play for
Updating figures post FY23 figures and new WPP guidance. Forecast EPS changes are modest (FY24E -4%) but net negative, mainly due to higher non-operational changes. The analyst call gave no indication of client behaviour changes (including tech) for the better though highlighted a stronger new biz
WPP Q4 23/FY 23 came in line with the trading update released at the end of January. The group confirmed FY 24 organic growth/adj. EBIT guidance but financial expenses and tax rate came above estimates, implying c.3/4% consensus EPS cut. 2024 is likely to be back-end loaded with negative organic sales in Q1 before sequential improvement. We remain supportive of WPP''s strategic initiatives (simplification, AI investment, cost optimisation, cross fertilisation) and think they will better position the group going forward. That said, the reorganisation is not over and we continue to think WPP will have to reinvest more to remain competitive, therefore limiting upside on margin. We reduce our EPS estimates by c.-4% and maintain our Neutral rating with 775p TP (from 800p). Q4 23/FY 23 in line with recent trading update Main highlights in Q4 were the persistent weakness in North America (-4.1% due to tech, healthcare and retail clients), offset by robust momentum in the UK (+5.1%). GroupM accelerated a bit (+5.7%) but Creative deteriorated (-3.4%). FY 24 guidance reiterated but financial expenses and tax rate came higher After +0.9% organic sales growth in 2023, WPP is guiding for 0% to 1% in 2024 (vs VA consensus at +0.8%). Adj. EBIT margin is expected to increase +20bp to +40bp, which seems reasonable given cost reduction initiatives (efficiency gains, VML merger, GroupM simplification). Financial expenses should increase +13% YoY due to debt refinancing at a higher rate. Adj. tax rate is expected to increase to 28% in 2024 and further pressure is expected in the following years. Conference call highlights (1) Group expects a slow start to the year (organic sales likely down in Q1) and a progressive recovery, helped by tech clients'' stabilisation. (2) No MandA envelope for 2024 does not mean WPP is not looking for acquisitions. (3) 2024 net debt likely to be stable YoY. (4) China expected to remain challenging in 2024. (5) Pitch environment is more...
WPP^ (WPP, Buy at 780p) - Full year results
FY23 figures (to Dec) as recent guidance and roughly in line/slightly below our forecast. Media is better in 4Q but Creative worse, with the US also down in 4Q; to some extent tech related. Non-operational guidance for FY24 looks slightly worse than we forecast so expect small (low single digit) ne
WPP^ (WPP, Buy at 765p) - Full year results preview
WPP^ (WPP, Buy at 777p) - New growth strategy
CMD yesterday gave a positive update on the material transformation at WPP since 2018 with more depth/credibility/detail on group-wide technology, data capabilities plus ability to leverage AI. New medium term financial targets look doable in our view though still depend on execution on a 3-5 year
WPP organized a CMD to present its new key strategic initiatives and announced that it expects over the mid term (3/5 years) to generate +3% organic sales growth, 16/17% headline EBIT margin and 85% Operating CF conversion. While WPP is going in the right direction, we think the group will have to reinvest more to support 3% organic sales growth and therefore see downside risk on mid term margin. Also, the near term momentum will remain soft (at least until Q3 24). We leave our estimates mostly unchanged and keep Neutral rating with GBP800 TP. WPP key strategic initiatives go in the right direction As expected, the plan is a continuation of previous strategy with focus on group''s simplification (90% of revenue from 6 major networks), cost optimization (GBP125m net savings from GroupM simplification and creation of VML/Burson + GBP175m gross savings related to previous transformation plan), focus on faster growing segments (commerce, influencer marketing, retail media) and AI/Data/tech (improve clients return with AI enabled services / tech, GBP250 annual investment to support AI and data strategy). Mid-term margin target looks ambitious, we keep 16% mid term Adj. EBIT margin WPP expects to achieve mid-term topline guidance (+3% OSG) without reinvesting much since the GBP 250m investment on AI / Tech is not really incremental (c.GBP200m already invested in 2023). This looks ambitious given peers'' additional investment. With this in mind, we remain cautious on margin and only assume 15.5% adj. EBIT margin in the mid term. Momentum to remain soft in 2024 with low single digit growth After +0.9% OSG in 2023, WPP is guiding for 0% to 1% OSG in 2024 (vs VA cons.at +1.1% and company cons at +0.6%) and 15.0%/15.2% Headline EBIT margin. We expect a soft H1 24 (Organic sales -0.4%) and a progressive acceleration in H2 (+1.6%). Restructuring costs will remain elevated (GBP285m) limiting FCF improvement. Maintain Neutral with tweaked TP of GBP 800.
Update ahead of strategy CMD today looks sensible overall, if not groundbreaking; we await more detail at the event itself. New mid-term growth targets suggest slightly lower LFL net sales growth vs before but higher margin. New FY23/FY24 trading guidance looks marginally above consensus, so we exp
WPP^ (WPP, Buy at 728p) - Refresh and reboot?
Media Sector comment - Positive UK marketing spend expectations
WPP Plc Ebiquity Plc
Ahead of its capital market day on January 30th, we discuss in this report how WPP delivered on its previous plan and what we can expect for the new one. Overall, WPP exceeded expectations of the previous plan set in 2020, but the exit momentum is weaker than expected. Looking at the new plan, we think WPP could reiterate its previous mid-term guidance (+2.5% / 3.5% OSG, 15.5% to 16.0% adj. EBIT margin) despite a recent new savings program, implying that the group needs to reinvest a bit more to achieve its organic sales growth guidance. We have reduced estimates by c.-3.5% but increased price target to 790p given peers'' rerating since last update. WPP exceeded its initial plan overall, but exit momentum is weaker than initially planned The group overdelivered on most KPIs in 2021 and 2022, but the momentum deteriorated in 2023 and both organic sales and adj. EBIT margin disappointed. This is partly due to tech client weakness and weaker macro but also to some missteps, given underperformance relative to peers. WPP likely to maintain focus on growth acceleration, simplification, and cost optimization The group will likely continue its simplification process (network / brand merger) and cost reduction (simplified ERP organization, shared services, campuses ramp up) while investing in fast-growing segments (experience, commerce, and tech). Gen AI will also be an important focus. WPP could mostly reiterate previous mid-term targets Based on current market conditions, the group''s positioning, recent momentum (soft with -0.9% organic sales decline in Q4 23e), and expected reinvestment into the business (GBP100m / 150m), we think WPP could guide to 2.5% / 3.5% organic sales growth in the mid-term, but 2024 guidance will likely be c.+1.0%. In the meantime, we expect the group to reiterate its previous adj. EBIT margin guidance (15.5% to 16.0%) despite a recent new savings announcement. This guidance would come well above consensus estimates, but...
Ahead of the Q4 23 release, we update our Agencies models. Our Q4 organic sales estimates are unchanged, as market conditions remain mostly in line with prior months. We expect Publicis to lead the pack with +4.5% OSG. Looking at 2024, we increase organic estimates for OMC but are more cautious for IPG and WPP, as we see no sign of rebound for tech clients. We maintain preference for Publicis, which should outperform peers due to its business mix and net new business contribution. We raise TPs for all four companies given peers'' rerating since last update. Publicis: Q4 OSG likely in the high range of guidance We model +4.5% OSG in Q4 23, supported by solid trends for Media (OSG +8%) and Epsilon (OSG +8%). Though slowing down, Europe should remain an important growth driver. We slightly reduce our mid-term EPS (-1%) on FX headwinds. Omnicom: Mid-point of Q4 guidance within reach, slightly more positive for 2024 We expect +3.9% OSG in Q4 23 with a sequential acceleration in the US and Europe. Considering solid wins in recent months, we now model +3.5% OSG in 2024. We have upgraded EPS by c.+3% to reflect higher OSG, favourable FX and slight accretion from the Flywheel acquisition. WPP: Still soft momentum in Q4, slightly more cautious on 2024 given entry rate We forecast a -0.7% organic sales decline in Q4 due to weakness in the US and for tech clients. We turn more cautious on 2024 and now expect +1.3% OSG. Soft OSG should be partly offset by cost reduction, and we model a +50bp margin increase. We reduce EPS estimates by -3%. Interpublic Group: Sequential acceleration in Q4 but fair to be cautious for 2024 We expect Q4 23 OSG of c.+1%, helped by improved momentum for Healthcare and increased net new business impact. Next year will likely remain challenging; we forecast +1.7% OSG and adj. EBIT margin down -10bp. We reduce our mid-term estimates by c.-2%.
Initial Equity Trading Comments - 10 January 2024
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WPP^ (WPP, Buy at 755p) - More Kantar cash and a modest valuation
Meeting Notes - Oct 27 2023
WPP Plc Airtel Africa Plc
WPP^ (WPP, Buy at 684p) - Long-term value
Updating forecasts post the 9M conference call: FY23E EPS -3% with -5% in FY24E net of +1% FX benefit. ADD – while shares may drift in challenging macros, we see longer term value, even allowing for exceptional costs, though the economic environment remains difficult and next year is tough to call.
The activity was below expectations in Q3 23. The organic net revenue decline (-0.6%) was still due to low customer spending in the Technology sector in the US and the UK and the negative effect from client losses. The trend deteriorated also in Germany and China. Within the Global Integrated Agencies (82% of the total), GroupM activities were disappointing (+1.6%). On the positive side, there was much higher contract wins in Q3 23 vs Q2 23. 2023 guidance was revised downwards.
WPP''s Q3 23 came below estimates (-0.6% org. growth) due to persistent weakness in tech clients, US and China. The group cut its FY 23 guidance and now assumes +0.5%/+1.0% organic sales growth (implies c.-1.0%/+0.5% in Q4) and c.14.65% headline operating margin. On the other hand, the group announced at lease GBP100m of additional cost savings (full impact in FY 2025) linked to creative agency mergers and Group M simplification. The group should update on its mid-term strategy during a Capital Market Day in January 2024. We have cut our 2023e EPS estimates by c-4% and reduce our price target to 750p (from 840p). A soft Q3 impacted by weakness in tech clients, US and China WPP Q3 23 sales came 2% below estimates with organic sales down -0.6% (vs VA cons. +1.5%, WPP cons. +1.0%). Decent performance in Europe (org. growth +1.1%) and Row (org. growth +2.8%) was offset by weakness in North America (org. growth -4.1%). FY guidance implies persistent weakness in Q4 WPP FY 23 organic sales guidance (+0.5/+1.0%) implies Q4 23 organic sales between c.-1% and +0.5%. The bottom end factors in continuation of the trend seen in Q3. The higher end assumes improved performance at Group M. Post revision, we model -0.9% organic sales in Q4 and +0.7% for the FY. Looking at 2024, no guidance was provided but the CFO recognizes the start to the year will be weaker than in 2023 and net new business should be a small headwind. On the other hand, tech client weakness should be annualized by Q2 2024 and strategic initiatives (VML, Group M) should drive growth. We model 2.2% organic sales growth in 2024 (vs +2.9% before). Conf call main highlights (1) VML creation: Mgt expects revenue synergies through scale benefits and complementary offers. Restructuring costs are expected to be GBP100m. (2) Group M: Simplification along with improved execution should help Group M improve momentum in the US. (3) Mid-term margin: Previous guidance stands for the moment, and should...
3Q figures are below forecast with a further FY LFL growth and margin guidance cut. We expect low single % EPS reductions for FY23E with more like mid-single digit for FY24E. ADD – we see value, even allowing for exceptional costs, though macros remain difficult near term and next year still tough
Meeting Notes - Oct 26 2023
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WPP^ (WPP, Buy at 691p) - Q3 trading update flags short-term headwinds
WPP^ (WPP, Buy at 711p) - Q3 results preview
Shore Capital Media and Digital News Summary
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Following a change of analyst, we have updated our thoughts on agencies. While we remain supportive of the sector, the macro outlook is deteriorating, our Headcount Monitor shows sequential slowdown and Tech client spend is likely to remain soft in the near term. With this in mind, we think it is important to be selective. We have a clear preference for Publicis (Outperform), while we turn more cautious on WPP (downgrade to Neutral). We remain Neutral on Interpublic and Omnicom. We remain supportive of ad agencies for the mid to long term... We are constructive on the sector, given the importance of agencies for brands in an increasingly complex and fragmented media landscape, no sign that bear arguments (in-housing, pricing pressure, competition from consultancy agencies) have been borne out over the past 12m, decent top-line growth prospects (+3/+4%), further leverage on margin (cost optimization, favourable business mix), potential Gen AI tools net benefits (notably on margin) and low valuation multiples relative to market (40% discount to MSCI World). ... but there are some challenges in the near term After a better-than-expected H1, H2 will likely prove tougher as the macro should lose momentum toward the end of the year, with the US entering into a mild recession and stagnation in the Eurozone. Despite revenue diversification toward more visible segments, Ad agencies'' business remain tied to the macro cycle. Our Headcount Monitor implies further slowdown in the past 6m (headcount +2% in past 6m vs +3% in past 12m) while the sector on average has guided for stable LFL in H2 23. Finally, tech clients (c.15% of agencies'' 2022 revenue) could remain soft in the near term. With this in mind, we have now a clear preference for Publicis (+) Considering its high exposure to fast growing segments (50% of net revenue) and solid momentum on new business wins, Publicis should be able to continue outperforming peers on LFL while at least maintaining...
WPP''s key strategic initiatives are steps in the right direction and should help better position the company. That said, the transformation is far from over and comes with execution risks. We notably expect a large part of the gross savings to be reinvested, limiting the room for EBIT margin expansion. While shares have been weak in recent months, we expect momentum to remain soft in H2 23. We downgrade our rating from Outperform to Neutral. Our revised TP of 840p implies c.8x EV/Adj. EBIT (BNPP def) 2024e, largely in line with Interpublic (=) and Omnicom (=) and at a c.20% discount to Publicis (+). LFL growth unlikely to rebound materially in the short term After a weaker than expected Q2 23, we expect momentum to remain soft in H2 23 given exposure to Tech clients, only progressive recovery in China and the impact from some contract losses at the end of the year. We model c.+3% LFL for WPP in FY23-25e, broadly in line with peer average. Limited room for margin expansion We expect WPP to deliver on its cost reduction program but reckon that most of the gains will have to be reinvested in the business. Restructuring expenses have been elevated in past years and should remain sizeable until 2025 at least. This will weigh on adj. EBIT margin (BNPP def) and FCF generation, we think. Model update - Company def. estimates mostly unchanged, adj. BNPP Exane metrics -6% Given recurrence of restructuring costs in past decade, we now include c.GBP90m of ''recurring restructuring charges'' in our adj. EBIT calculation. This leads us to reduce BNPPE Adj. EPS by c.6% on average. With momentum expected to remain soft in H2 23 we downgrade to Neutral. Where could we be wrong? We identify three main catalysts that could provide support to the share: (1) WPP being able to deliver at the higher end of its mid-term adj. EBIT margin target (15.5%/16.0% vs cons. 15.3%), (2) monetization of the Kantar stake GBP1bn), (3) more active and value accretive MandA.
Updating figures post 1H results and WPP FY23 guidance changes on 4 Aug. Downgrades are greater than we had signalled at EPS level for FY23/24E at -6%/-8%, with operational changes roughly as we had expected but a greater FX hit, especially at margin level. ADD – shares look cheap vs through the cy
WPP^ (WPP, Buy at 809p) - Downgrades priced in
WPP Q2 23 came below estimates on LFL due to lower spending from tech clients (notably in the US). Given softer Q2 and cautious assumption for tech clients, WPP revised down its LFL guidance. Headline EBIT margin guidance is stable at cc but will face stronger FX headwind which implies 25bp cut. We have cut our adj. EPS estimates by c.-12%. Beyond the weaker than expected momentum for 2023, we continue to see good recovery potential driven by new business gains and transformation program. We keep Outperform rating with GBP 1,050p TP (vs GBP 1,300p). Weaker LFL in Q2 due to North America, Adj. EBIT in line Q2 LFL sales came at +1.3% (vs +3.1%). Better trend in UK (LFL +9%) was offset by weakness in the US (-4.1% LFL) and Row (+3.1% LFL). Weakness in the US was mostly related to softer spending with Tech clients (c.19% of group''s sales). H1 adj. EBIT came in line with estimates at GBP 666m which implies 11.5% adj. EBIT margin (-10bp YoY, +10bp excl. FX). 2023 guidance reduced to reflect Tech weakness in the US Considering soft Q2 and limited visibility regarding Tech clients spending recovery, WPP is now guiding for +1.5%/+3% LFL sales (vs +3%/+5% before). This implies c.+1%/c.+4% in H2 2023. Easier comparable basis in H2 is offset by cautious assumption for tech clients. Headline EBIT margin is expected at c.15% excl. FX and c.14.75% including 25bp FX headwind. Conference call main takeaways (1) Tech clients soft spending: no structural issue but rather temporary weakness. Difficult to say when spending will return (2) Mid term headline EBIT margin (15.5%/16%) still valid, (3) Net new business: Solid pipeline but loss of contract in pharma (Pfizer) to weight by Q4 23, (4) Property portfolio review to generate GBP30m gross savings in 2023. FY23/24/25 estimates change: Adj. EBIT down c.-7%, adj. EPS c. -12% We have revised down 2023 LFL by 180bp to 2.2% in 2023, and by -55bp for the following years. Accordingly, we have reduced Adj. EBIT...
Organic net revenue growth slowed in Q2 23 (+1.3%) due to a deterioration in the trend in North America and slower than expected growth in China. GroupM continued to outperform with strong organic growth (+6.1%). The headline operating margin was broadly stable (-0.1pt to 11.5% of net revenue). The 2023 guidance has been revised downwards for organic net revenue growth (now +1.5-3.0%) but remains unchanged for the headline operating margin (15% of net revenue) excluding the currency effect.
1H figures show LFL sales disappointing in 2Q but margin better. Guidance reduction in FY23 LFL net sales growth. Initial thoughts on forecasts is c. -1.5% to EPS this year (to bottom of range) and -3% in FY24E (the latter allowing for FX). ADD – we like the shift to growth/cost simplification thou
Initial Equity Trading Comments - 4 August 2023
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WPP^ (WPP, Buy at 847p) - Interim results
WPP Plc DFS Furniture PLC
Marks & Spencer+ (MKS, House Stock, 205p) - Marble Arch
WPP Plc Marks and Spencer Group plc
WPP reported broadly in line Q1 2023 revenues WPP reported net revenues organic growth at +2.9%, a touch above consensus at +2.4%. The performance was driven by the UK at +7.4%, Continental Europe at +3.4%, but more modest growth in North America (+1.9%) and the Rest of the World. We note that China came in at -13% and is expected to recover from Q2 2023 onwards. Excluding China, organic growth was +3.6%. GroupM (c36% of Group net sales) grew +6.1%, suggesting that Global Integrated Agencies excluding GroupM grew +0.7% (impacted by a slower start to the year at Wunderman Thompson, primarily due to lower spend from some technology clients). WPP reiterated FY23 guidance WPP reaffirmed FY23 guidance with organic growth between 3%-5% and headline operating margins at c15% (excluding FX). The reiterated organic growth guidance implies the company does not anticipate a deceleration throughout the year but rather an improvement. On the call, CFO John Rogers expects H2 23 to be a bit stronger than H1 23, with margins also being skewed towards H2. Elsewhere, WPP announced KKR took 29% of FGS Global (PR) Following press articles on the matter in recent weeks, WPP announced/confirmed KKR is to take a minority stake (29%) in FGS Global (strategic communication company that offers services including Corporate Reputation, Crisis Management, Government Affairs related missions and Financial Communications) at a USD1.425m valuation. Forecast changes We do not change our operating expectations for the company although we update our FX, which leads to 1% EPS decline in our model versus our previous estimates. We rate WPP Outperform In the context of a bullish stance on the ad agencies, we see the most upside risk at WPP (see our recent upgrade here) - which is not reflected in current valuation at 7x EV/EBIT 24e.
In Q1 23, organic net revenue growth (+2.9%) was somewhat disappointing as it was slightly below the low-end of 2023 guidance (+3-5%). While GroupM outperformed with strong organic growth (+6.1%), growth was weak in the Creative agencies (+0.7%) and the Specialist agencies (+1.9%). There were disparities between the geographic areas including low growth in the US and a drop in organic net revenue in China. 2023 guidance was unchanged.
WPP^ (WPP, Buy at 957p) - Positive start to FY23F
We have been Neutral on WPP since early 2022, when we turned more positive on the ad agency sub-segment, arguing it was not as challenged as the market thinks. Now, with WPP having underperformed Publicis by 30% in 2022, we think it is time to revisit the investment thesis. We turn more positive on both i) the agency sub-sector, which in our view should sit in the ''quality'' media basket and no longer in the ''cheap cyclical'' one and ii) WPP itself, which we upgrade to Outperform. WPP scores well on our Headcount and Advertisers'' Outlook Monitors Our Headcount Monitor suggests that WPP has been leading tech-savvy recruitment in the past 6 months, which is indicative of a healthy digital pipeline. In parallel, WPP''s recent contract wins are set to come with high marketing spend, which could bring upside risk to our organic forecasts. We see easing pressure on margins and positive catalysts ahead After a mixed margin performance in 2022 (China, use of freelancers), we see easing pressure on WPP margins at a time when the company should deliver improvement from its ambitious transformation plan. Finally, we see WPP''s more ambitious tone on MandA, the arrival of a new CFO in a couple of weeks and a potential Kantar stake value crystallization as upside risks to our case. We raise our EPS forecasts by 8% in 2024e and 12% in 2025e Higher organic growth (from 1.9% to 3.5% in FY24e, from 2.1% to 3.4% in FY25e) and higher margins lead us to raise our EPS forecasts by 8% in 2024e and 12% in 2025e. Our 2023e forecasts are barely changed. Our new numbers sit c5% above consensus. We forecast a 10% 2023-25e EPS CAGR, the highest of the Top4 agencies. We raise our target price to 1,300p (from 965p). At our new TP, the shares would trade on 11x 2024e PE and 9x 2024e EV/EBITA. We upgrade WPP to Outperform (from Neutral) - WPP is our top pick for the next 12 months WPP trades on a 15% discount to peers on EV/EBITA 24e, which in our view is not justified in the...
We have argued for some time that ''scar tissue'' from agencies'' performance during the GFC has led to an underestimation of their resilience. Now, as we enter a period of systemic risk, spiking inflation and interest rates, our work suggests that even though the macro may take a toll, the Mad Men are not only safer, but one of the most appealing sub-segments within Media. We raise WPP to Outperform, Omnicom to Neutral and tactically downgrade Interpublic to Neutral. WPP becomes our top pick for the next 12 months in the space. Industry overview: From good value to great businesses? Following multiple upgrades to 2022 guidance by ad agencies and surprisingly strong FY23 guidance, we leverage new work on our proprietary Headcount and Advertiser Outlook tools, identifying c4% ad budget growth CAGR 23e-25e among agency clients. We no longer have any Underperform ratings in our global ad agencies coverage: with the sub-sector trading on 10x PE 24e and 8x EV/EBITA 24e, we would buy the more visible growth ahead. We argue that advertising agencies have earned an upgrade from media''s ''cheap cyclical'' basket to its ''quality'' one. Top pick is WPP (+), Publicis (+) a long-term winner We upgrade WPP to Outperform with c40% upside - in our view the best play for the next 12 months given: i) the healthiest score in our Headcount Monitor; ii) easing pressure on margins; and iii) upside risk with the new CFO, more ambitious bolt-on MandA strategy and Kantar stake monetization. We remain Outperform on Publicis Groupe, which we view as ''one for the kids'', a long-term play with first-mover advantages in revenue diversification (data, digital transformation) and efficiency. Sector strength, but lacking catalysts: Omnicom (- to =) and Interpublic (+ to =) We upgrade Omnicom to Neutral given sub-sector tailwinds and downgrade Interpublic to Neutral following a good run. For both we see less upside risk than WPP and Publicis in terms of valuation and operating...
In Q4 22, organic net revenue growth (+6.4%) was in line with expectation, including a sequential improvement. GroupM outperformed the group with organic net revenue growth of +8.8%. In 2022, organic net revenue growth was at the high-end of guidance (+6.9%) and was driven by GroupM (+9.1%) and Public Relations (+8.2%). The headline operating margin improvement (+0.4pt to 14.8% of net revenue) was in line with the guidance. The 2023 guidance includes organic net revenue growth and a slight margin improvement.
WPP closed the ad holdcos'' results season with strong performance WPP reported a good set of numbers with Q4 22 organic growth at +6.4% (versus consensus at +5%), implying a c10% 3y stack (in line with Interpublic Q4, versus Publicis at 15% and Omnicom at +7% 3y stack). FY22 margins came in line with expectations at 14.8% efficiency savings, supporting investment and margin expansion. Bottom-line adjusted diluted EPS came 3% above consensus. Guidance: unsurprisingly good organic growth, ambitious margin expansion Management guided for organic net sales growth from 3% to 5% for FY23, in line with Publicis and Omnicom earlier this month. However, in our view, the positive surprise was the margin guidance of ''around 15%'' (consensus was a touch below that), suggesting a 20bps margin improvement. Forecast changes We have upgraded our organic growth and margin forecasts to reflect the company''s guidance for FY23. We now stand at +4% organic net sales growth (mid-point of guidance) and at 15% on margins (from 14.6% in our previous model). We also reflect the change in treatment of the Kantar associate (no longer included in the Headline PBIT) and a more conservative buyback policy for FY23. Bottom-line, we increase our EPS by 7%/4% 23e/24e. We also increase our DCF-based target price by 18% from GBP820p to GBP965p, higher than our EPS increase, reflecting improving fundamentals. We remain Neutral on WPP We remain broadly supportive of the ad agency subsegment, where we see a real change of paradigm in both the normalised level of growth and its positioning in the value chain. Although we would be supportive of a broad rerating, we are happy to remain Neutral on WPP reflecting 1) historically less ambitious revenue diversification strategy and 2) the company is a late comer in its cost transformation versus peers. We rate WPP Neutral.
FY22 figures (to Dec) are good/better with positive guidance. Our initial view is that our forecast FY23E EPS should increase c.+6% to c.103p. ADD - We really like the shift to growth and cost simplification though this takes time to work through and prove itself, while more uncertain macros are un
2022 was a disappointing year for investors in the media sector as its constituents grappled with a range of external challenges and share price performance was dominated by fear of the future rather than current trading. Recent updates from our coverage stocks have, in reality, been broadly as expected and we see several attractive upside opportunities from depressed valuation levels. In this note we set out a few high-level thoughts across the various subsets of the sector, highlight our current recommendations and provide information on the timing of forthcoming updates.
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WPP held a Webinar on its operations in Brazil and India WPP''s Brazil and India country managers presented i) their markets'' dynamics (demographics, ad market) and ii) the key areas of strategic developments (including Centers of Excellence, integration within the larger WPP network of brands). Brazil - a digital first-mover advantage Brazil (c2.3% of WPP revenues) employs 7k talents and has been presented as a first mover in digital, evidenced by digital net sales accounting for 60% total net sales and margins above group levels. With 60% net sales generated from Experience, Commerce and Technology (sizeably higher than group level), WPP''s differential advantage in the country lies with its partnerships with platforms (VTEX, Google, Meta, Salesforce) and the number of employees that are ''certified''. India - focus on the Centers of Excellence WPP''s 5th largest country, India, accounts for 2.8% of net sales and has 10.5k employees on 2 campuses. A key aspect of WPP''s capabilities in India is the development of Centers of Excellence, with c64% of India''s employees dedicated to Martech/CX, Production, Media, Commerce and Health for global clients. We remain Neutral on WPP WPP is the advertising agency with the largest exposure to emerging markets. In terms of WPP in Brazil and India, we like its leading competitive position in communications services and its healthy development on the digital and technology front. However, both countries combined only account for c5% of group net sales: the investment case on the company remains the same. While we have a constructive approach on the ad agency sub-segment, an increasing portion of concerns on WPP are now related to margin delivery and the 2023 outlook. At c9x PE 23, we argue that a lot of the risks are reflected in the share price. We remain Neutral on the name.
In our latest comment on advertising spend we focus on updated estimates from the respected forecaster GroupM. These point to a c.5% increase in global revenues in 2023, agg. growth of 29% 2022-27 and argue against a collapse of the sort we believe is reflected in many stock valuations. We see significant upside potential from five of our coverage stocks, Future^, ITV^, STV+, Mission Group+ and WPP^ and view Ebiquity^ as a core beneficiary of increased focus on the efficacy of marketing spend.
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With the Q3 over, we reassess trends at ad agencies and the larger ad ecosystem. Agency growth versus big tech, operating leverage and revenue visibility were the key focus. We present our 3 lessons from Q3 and reiterate our preference for Publicis Groupe and Interpublic. Lesson #1: Advertising agencies closing the gap with big tech The performance gap has narrowed. Ad agencies beat expectations and raised FY22e organic growth outlook, while US platforms, and more importantly social platforms (SNAP, Twitter, META), saw slowing growth and started to take corporate actions (FTE reduction, cost-cutting, etc). Lesson #2: All operating models are not equal Publicis was the only ad agency that upgraded its margin outlook, underpinning our view that not all organic growth is equal, with operating model efficiency being a key driver to protect EPS. Lesson #3: Diversification does matter for ad agencies Asset mix diversification is likely to mitigate top-line headwinds. No longer are all agency revenues are exposed to the ad market. New services typically include multi-year contracts, recurring revenues (licensing fees, consulting fees, etc.) and e-commerce/data-led activities. Two things to monitor: Larger ad ecosystem and Top70 advertisers'' outlook still supportive Our Advertisers'' AandP Outlook Monitor suggests agency clients will likely continue to spend in 2023, even more so after successive price increases. Top-line consensus revisions favour agencies. The worse may (not!) happen - a repeat of 2009 marketing budget cuts would be less severe Marketing budget cuts similar to 2009 are in our view unlikely next year. Ad market dynamics have changed (with digital accounting for c10% in 2009 versus 67% today), and brands can monitor and adapt their budgets much more rapidly and effectively with measurement and data. We believe a slow fade in marketing expenses is more likely than sharp cuts. Our forecasts and TP are unchanged for our agency...
In the latest of our updates on advertising spend expectations, we summarise the key messages from company updates, industry forecasts and survey data. Not surprisingly, this information set suggests more challenging times ahead but not a collapse of the sort that we believe is already reflected in valuation metrics for many ad-sensitive stocks. Specifically, we see significant upside potential from five of our coverage stocks, Future^, ITV^, STV+, Mission Group+ and WPP^ and, looking further afield, see Ebiquity^ as well placed to capitalise on an ever-increasing focus on the efficacy of marketing decisions.
WPP reported revenues broadly in line with consensus WPP reported organic net revenue growth at +3.8% in Q3, 30bps above a conservative sell-side consensus. This implies a 20% 2y stack and a 11% 3y stack (a slight improvement versus Q1/Q2). On the less positive side, Western Continental Europe came in at -2.1%, but this negative performance was largely related to Germany, which had a boost in the previous year from a COVID-19 related contract (excluding this impact, Group growth would have been +4.8% and West. Cont. Europe +2.5%). Mixed guidance update The company upgraded (or rather narrowed) its FY22e organic net revenue growth guidance from 6%-7% to 6.5%-7% (high end of previous guidance). On the more negative side, the company lowered the margin guidance from ''up around 50bps improvement'' to ''up 30bps to 50bps''. One reason for that was the weak performance of China (-9% organic growth in Q3), which negatively impacted margins by 20bps. Confident tone on the conference call and comments from Management CFO John Roger outlined that the company has good visibility on 80%-85% of the net revenues in Q4, which is a positive in our view. On 2023, WPP CEO Mark Read has outlined good new business momentum and continued investments from clients, who are not pulling back marketing expenses but rather adopting a ''positive attitude''. Forecast tweaks - We remain Neutral We upgrade our organic net sales expectations from 6.2% to 6.6% for FY22e, lowering FY23e from 0.4% to 0.1% to reflect the impact of tougher comps. We slightly lower our margins by 10bps to adjust to the new guidance. Bottom line we cut our EPS by 1%/3% for FY22e/23e and our TP by 5% to GBPp820 from GBPp860. Despite growing fears on the growth outlook and earnings trajectory in 2023, we believe that at 7x PE 24e (on our numbers), a lot of the risks are reflected in the current share price. We remain Neutral on WPP.
3Q LFL above forecast with a modest FY guidance upgrade as peers though the beat feels slightly below some of those peers and with a slightly lower margin range now suggested. There are a few moving parts, not least FX, though our operational forecasts look unlikely to change materially on a net ba
Q3 organic growth should be healthy amidst increasing investor scepticism At a time when investor sentiment on the ad market is turning more negative (with growing slowing in some segments) agencies'' message have been reassuring, indicating that Q3 should reflect continued momentum for IPG/PUB and low to mid-single digit growth for WPP/OMC. FY23 likely the focus Consensus already expects a slowdown in agency top-line growth (with fears of negative quarters). Our discussions with investors suggest that the i) timing and ii) extent of macro impact on agencies is more debated. We are among the optimists on the back of: i) inflation led brand price increases boosting media revenues; ii) our work on agency clients'' suggesting better resilience in marketing spending and good confidence regarding inflation risks; and iii) better resilience from large brands versus SMEs as argued in our latest report Mad Men meet the macro (View full document-72p) Forecast changes For Publicis Groupe, we have nudged up our FY22e organic net revenue growth estimate from 7.1% to 7.2%, above company guidance of 7%. We have also updated our forex modelling for 2022 and 2023, leading to the EPS upgrades. For WPP, we have lowered our organic net revenue growth expectations by 30bps for FY22e to 6.5% to 6.2% on the back of a lower organic net revenue growth expectation for Q3 22e. We have updated FX for OMC/IPG with no annual forecast changes. We remain rather confident on agencies ability to weather economic weaknesses While we do expect a sizeable deceleration in growth in FY23e, we remain confident around agencies'' ability to protect their earnings and to be more resilient in an inflationary environment. That said, we prefer Publicis Groupe and Interpublic on the back of better long-term growth outlook and operating leverage. We remain Neutral on WPP, Underperform on Omnicom.
Continued share price weakness – reiterating BUY recommendation
You remember what happened in 2009. A big recession and a nasty hit to agency share prices. Why would you want to go there again? Because while it won''t be easy, this time the Mad Men can take on the macro. We''ve built detailed pictures of EPS trajectories under recession, with granular work on the often-opaque world of revenue and cost streams, to uncover impressive and arguably overlooked resilience. What''s more, we''re adding the US leaders to our European coverage, for global coverage of this global industry, with new benchmarks and in-depth read-across. Our top picks are Publicis (+) and Interpublic (+) on stronger organic growth supported by their progress on the pivot to higher quality revenue streams. WPP is (=) and Omnicom a relative Underperform.
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WPP reported organic growth above expectations but slightly disappointing margins WPP reported organic net sales growth of +8.3% (implying 29% 2y stack and 10% 3y stack), above consensus at +5.5% (arguably expected as Publicis, Omnicom and Interpublic also beat consensus earlier in July). While the company outlined that the performance was broad-based, the organic beat was driven by North America at +10.2% (25% 2y stack and c13% 3y stack) and GroupM at +10.9% in Q2 (on tough comps of +28.6%). However, margins came 30bps below consensus due to salary pressure in the US (mostly freelancers) where the company has grown faster than expected. Organic growth guidance upgrade with a confident message The company has also upgraded FY organic net sales growth guidance from 5.5%-6.5% to 6%-7%. New guidance still implies a deceleration between H1 to H2 on an organic and 2y basis, while it suggests a stable 3y stack between the two semesters. Margin guidance is unchanged. While management had a confident tone on ongoing momentum with clients, shares fell 8% at the opening; we believe that concerns around the margin trajectory in a tough macro environment are elevated. Changes to estimates We upgrade our organic net sales growth expectations from +5.9% to +6.5% following the guidance upgrade. We also reflect the lower income from associates (due to the Walmart account loss at Haworth and higher interest costs at Kantar post the Numerator acquisition). We keep our margin expectations unchanged and forecast 40bps margin expansion for FY22e. Bottom line, we decrease our EPS by 3% for FY22. We remain Neutral on WPP At a time when cyclical fears are returning to the advertising agency sub-segment, we argue that top-line visibility has improved, and we believe management is rather conservative on the rest of the year. An increasing portion of concerns are now related to the margin delivery and the 2023 outlook. At 8.5x PE 23, we argue that a lot of the risks...
Q2 22 was strong with organic net revenue growth of +8.3%. The US activities were a strong growth driver, while the Chinese lockdowns affected the overall performance. In H1 22, the headline operating margin declined (-0.5pt to 11.6% of net revenue) due to wage inflation and the use of freelancers for which wage increases exceeded those of internal staff. 2022 guidance was revised upwards at the top line (organic growth of +6-7%) and unchanged for the headline operating margin.
Ahead of agency holdco reporting next week, we re-look at our WPP forecasts. We do not expect 2022 general outlook changes but cannot see substantive new 2023 guidance. Given ongoing macro questions/debate, we tweak down WPP 2H22E LFL net sales growth and move FY23E to flat (+3% before), part offse
Q2 results likely to be good, although broadly expected Last year''s Q2 is the toughest comparative for all agencies, as it marked the steepest rebound from COVID-19. Despite growing concerns about a slowing ad market, agencies'' messages have been reassuring, indicating that Q2 should reflect continued momentum. For the second quarter, we expect 7% organic net revenue growth for both WPP and Publicis Groupe. What about H2? The jury''s still out, but we are among the optimists for FY22e That agency growth is slowing and may land in negative territory in the quarters to come has become consensual. What is less consensual is the timing and the extent to which agencies will be impacted by the macroeconomic headwinds. We are among the optimists for H2, on the back of: i) new contracts flowing into agency revenues; ii) clients'' price increases boosting media revenues; and iii) our work on agency clients'' suggesting better resilience in digital marketing spending and good confidence regarding inflation risks. Forecast changes We have increased our FY22 expectations for both WPP and Publicis Groupe. We now expect 5.9% organic net revenue growth for WPP and 5.7% for Publicis Groupe for FY22e. At the margin level we stand a touch below the top end of guidance for WPP at 14.8%, and in line with company guidance for Publicis Groupe at 17.5%. We rate Publicis Groupe Outperform and WPP Neutral PUB/WPP have underperformed the sector by 10%/16% and now trade on 8x PE, yet the FY22e EPS for both has remained broadly stable. We leave our target price for both companies unchanged. With valuation still relatively inexpensive, we see a more favourable risk/reward and reiterate our Outperform stance. On WPP, we keep our Neutral rating.
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Caution overdone?
We hosted WPP for their IR roadshow in Paris WPP''s IR team provided an upbeat overview of the group''s performance for the first quarter of the year. While current trading in a context of cyclical fears coming back was addressed, the focus of the conversations was i) the company''s transformation and ii) WPP''s strategic priorities in terms of capabilities and capital allocation. Strong Q1 underpinning strategic progress The company explained that the performance has been very much ''broad-based'' by business line and geography. The Group''s efforts to offer more integrated services coupled with the scale of its media arm (GroupM, n1 media network globally) are seen as key elements of the investment narrative. Noticeable progress made on the transformation plan The team explained the company has made significant efforts regarding the gross cost savings, and that there is more to come. Key priorities include shared services (efficiency gains) and campuses/property (adapted for newer ways of working and efficiency gains). Despite macro uncertainties, WPP is confident on longer-term underlying market growth Despite growing concerns on household disposable income and brands'' marketing plans, WPP has not seen any deceleration or change in brands'' behaviour so far. The team also expects the agency addressable market to grow in line with brands'' growth/GDP in the long term, while ''secular challenges'' are not disrupting WPP''s ambitions. We remain Neutral on WPP At a time when cyclical fears are returning to the advertising agency sub-segment, we argue that top-line visibility has improved. As for WPP, we believe that at 9x PE 2023, a lot of the risks are well reflected in the share price. We remain Neutral on WPP.
WPP’s Q1 release summarised an encouraging start to the year - extending a period of positive trading, operational and strategic momentum. Forward looking comments were similarly pleasing with FY22F revenue guidance increased. We have nudged up our estimates in response and expect very attractive EPS and DPS growth (three-year CAGR’s of 12.5% and 10%, respectively). More broadly, we remain bullish on WPP’s underlying fundamentals and estimate a DCF-derived medium-term fair value for its stock of 1,871p, suggesting substantial upside potential. BUY.
Organic net revenue growth was strong in Q1 22 (+9.5%) thanks a good performance from GroupM, Specialist agencies and Public relations. WPP benefited from the strong demand for digital media, ecommerce, data and marketing technology. Technology, retail and healthcare were the most dynamic sectors inversely to automotive which remained impacted by the chip shortage. WPP raised its guidance on organic net revenue growth to integrate the stronger than expected Q1 22 and maintained its guidance on the operating margin due to wage inflation.
WPP reported results above consensus expectations WPP reported organic net sales growth of +9.5%, above consensus of c7% (arguably expected after Publicis and Omnicom also beat consensus for organic growth earlier in the month). This suggests a c13% 2y stack and a 9.2% 3y stack. While the company outlined that the performance was broad-based, the beat was mostly driven by Latam (+22.4%) and APAC (+10.4%). By discipline, GroupM momentum continued at +12.8% (on a +5.6% last year), while the strongest growth driver was Public Relations at +14%. Management upgrades FY like-for-like guidance The company upgraded FY22 like-for-like net sales growth from ''around 5%'' to 5.5%-6.5%. This was driven by 1) the better-than-expected performance in Q1 and 2) ''client demand for our services remaining strong as we enter the second quarter''. When asked on the moving parts of the growth for the remaining of the year, Management outlined clients'' budgets have remained unchanged. Changes to estimates We update our model for FX (now we have a c2% contribution from FX versus 0% before) and we also increase our organic net sales growth expectations from 4% to 5.3% to reflect the better-than-expected Q1 and the continued momentum. We leave our margins unchanged as per company guidance. Bottom line, we increase our EPS by 5% for 2022 and 2023. Finally, we increase our target price by 5% from 1,070p to 1,120p, in line with our EPS change. We remain Neutral on WPP At a time when cyclical fears are returning to the advertising agency sub-segment, we argue that top-line visibility has improved, and we believe management is rather conservative on the rest of the year. As for WPP, we believe that at 10x PE 2023, a lot of the risks are well reflected in the share price. Our new target price suggests 13% upside on current share price, and we are happy to remain Neutral on the name.
1Q call. Good momentum vs. cautious macros
Strong 1Q. FY guidance raise
Strong Q1, FY22F guidance raised
First things first: revisiting our numbers following Russian invasion of Ukraine The outbreak of the geopolitical conflict in Eastern Europe stopped agencies'' share prices in their tracks after a strong Q4 and upbeat 22e guidance. Understandably, cyclical fears are back. We revise our estimates for our ad holdco coverage to reflect a lower-growth environment. While visibility remains weak, ad agencies could show good resilience, we think. Do not underestimate agencies'' ability to protect earnings We believe that the agencies'' geographic mix and sizeable global mandates will ease the pressure from a Europe-centred conflict. We examine a previous regional crisis to assess the potential impact of organic growth headwinds. In the context of rising inflation and supply constraints, our analysis suggests that agency clients are confident in their ability to mitigate the risks. Better placed cyclically and structurally than feared As cyclical fears resurface, we believe agency momentum is likely to be more resilient than one might expect, thanks to a strong AandP expenses outlook coupled with improved top-line visibility for agencies. Furthermore, our analysis suggests that while structural pressures persist there are early signs of their deceleration - for the first time since 2017. Forecast changes We reduce our 2022/23e EPS by 4%/2% for Publicis and by 3%/1% for WPP, as we cut our European organic growth expectations by half and forecast a slightly lower operating leverage in FY22e. We revise our DCF-based target prices to EUR71 for Publicis, suggesting 25% upside, and to GBp1,070 for WPP, close to the current share price. Reiterate our preference for Publicis Groupe (+) to WPP (=) We expect Publicis Groupe to deliver a faster revenue transition story. With valuation still relatively inexpensive, we see a more favourable risk/reward and reiterate our Outperform stance. On WPP, we keep our Neutral rating. Our TPs imply 10.4x EV/EBIT ''23e...
We have upgraded our estimates to reflect the strong trading momentum and positive outlook assessment detailed in WPP’s highly encouraging FY21A results release (FY22F adj. EPS and DPS +2% and +3%, respectively) and have added FY24F forecasts. The latter contribute to our expectation of very attractive EPS and DPS growth (three-year CAGR’s 12% and 10%, respectively). More broadly, we remain bullish on WPP’s underlying fundamentals and estimate a medium-term fair value for its stock of 1,800p suggesting substantial upside potential. BUY.
WPP^ (WPP, Buy at 1177p) - Strong full year results reinforce positive stance
FY figures. Strong new biz and cash
Market positives and self-help
WPP reported results ahead of expectations Q3 organic sales growth came at +15.7% versus consensus at c10%, implying a 6.9% growth rate on a 2-year stack. Although WPP Management highlighted the performance was broad-based, we note the performance was driven by GroupM (+29% organic, +15.5% on a 2y stack), Hogarth, VMLYandR (both double digit organic) and specialist agencies, while some agencies have not come back (yet) to 2019 levels (Wunderman Thompson almost there, AKQA and Ogilvy still lagging). We note the strong performance in Germany was driven by a COVID-19 related contract that added 100bps to the group organic growth for the quarter. The company also raised guidance On the back of the better-than-anticipated results, WPP raised FY21 guidance for organic net sales growth from 9%-10% to 11.5%-12% and headline operating margins slightly above 14%. Guidance elements on capex and working capital outflow remained unchanged. When asked on the supply chain disruption risks, Management explained they have not seen any impact (or marginal headwinds for automotive clients), which is reassuring. Forecast change Reflecting the Q3 beat and the guidance upgrade, we increase our FY21 group organic growth forecast from 9.5% to 11.5%, at the low end of the new guidance. We broadly kept unchanged our margin expectations. Bottom line, we increase our EPS by 5%/2% for FY21e/FY22e. We reiterate our Underperform rating despite encouraging performance We upgrade our TP by 5% to GBPp1000 (from GBp955), in line with our EPS revisions for FY21. While we recognize the company has made sizeable efforts in recent quarters to simplify its structure and better position its digital assets, we remain sceptical on WPP prospects on the back of: 1) a less appealing asset mix versus PUB; 2) weaker new business versus prior year and versus peers; and 3) structural challenges not going away. We remain Underperform.
Very strong 3Q and guidance increase
WPP’s interims detailed a pleasing performance across the business with strengthening momentum through the half prompting the company to raise full year guidance. We have nudged up our FY21F adj. EPS and DPS estimate by 2% and 3%, respectively and continue to rate WPP as a high-quality company that is well-placed to add value to its blue-chip client base and to capitalise on an increasingly positive ad. spend backdrop. We retain our HOLD recommendation for now (downgraded from BUY in March) , but will continue to monitor developments with a view to adopting a more positive stance.
Last week WPP delivered H1 results ahead of expectations on back of broad-based recovery In the context of a steeper recovery for all agency holdcos, WPP reported Q2 organic revenue growth of 19.3% (versus consensus at c15%), driven by c+32% in the UK, and +27% in Continental Europe. H1 operating margins came in higher than expectations at 12% (versus cons. at c11%). Company raised guidance to reflect a strong H1 and positive momentum WPP Management upgraded FY21 organic net revenue growth from ''mid-single-digit'' to 9%/10%, while expecting a headline operating margin toward the upper end of the 13.5%-14% range. We believe the top-line guidance upgrade was broadly expected after successive beats from peers. Good performance translated into increased bonuses pool WPP has significantly increased the H1 incentives pool, with GBP244m of bonuses paid in H1. WPP CFO guided for a GBP450m bonus pool for the FY, versus GBP185m/294m in 2020/2019. GBP350m share buy-back plan for H2 announced The company committed to deliver the rest of the Kantar share buy-back plan, with GBP350m planned for H2 (in addition to the GBP248m completed in H1). Changes to estimates Reflecting the Q2 beat and the guidance upgrade, we increase our FY21 group organic growth forecast from 7% to c9%, at the low end of the new guidance. We tweak our margin expectations and now stand mid-range of guidance at 13.8% for FY21, and 14.6% for FY22. Bottom line, we increase our EPS by 5%/6% for FY21/22, reflecting the impact of the SBB on the number of shares. We reiterate our sceptical view despite reassuring performance We upgrade our TP by 5% to GBp955, in line with our EPS revisions. We remain sceptical on WPP prospects on the back of: 1) higher exposure to structural pressure; 2) shorter term exposure to Mediapalooza; and 3) a less appealing asset mix versus PUB. We remain Underperform.
The recovery was strong in Q2 21. Organic net revenue grew by 19.3% thanks to the improvement in the economic environment and strong demand for digital advertising, ecommerce and marketing technology. Consumer packaged goods, Technology and Healthcare & pharmaceuticals were the most dynamic sectors. In H1 21, the ‘headline’ operating margin rebounded to 12.1% of net revenue (+3.9pts). 2021 guidance was upgraded at the top line and WPP should return to the FY19 level in 2021, a year ahead of expectations.
Positive Call. FY21E upgrades
Meeting Notes - Aug 05 2021
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Strong 1H results and upgraded FY guidance
Advertising recovery steeper than expected Q2 21 expectations have materially increased (from high single digit to mid-teens) for Publicis and WPP, with momentum good and the recovery in advertising spending proving steeper than expected, due to ongoing vaccine rollouts, US government stimulus and the progressive reopening of economies. Advertising market growth expectations for FY21 have been upgraded, reflecting the steeper recovery curve. Meanwhile, PMIs are indicating steady Q2 trends in North America and in Europe, though less so in the rest of the world (later vaccinations, situation in India). Q2 results likely to be good, although broadly expected With Q2 2020 being the easiest comps for advertising holdcos, the rebound dynamics are well understood. For the second quarter, we now expect 13.7% organic net revenue growth at Publicis Groupe (above company guidance of 8% to 10%), and 14.6% for WPP (on easier comps). H2 uncertainties and ongoing Mediapalooza While we believe Q3 is likely to see continued good momentum and consumer enthusiasm over the summer, many COVID-19 risks remain for H2. Meanwhile, the Mediapalooza continues, with new reviews announced (Bayer, Eli Lilly, Chanel, Kingfisher). Our tracking suggests the top 10 reviews represent cUSD13bn billings (with new biz appointments up +38% yoy, +25% vs 2019). Forecast changes We have increased our FY21 expectations for both Publicis Groupe and WPP. We now expect 7% organic net sales growth at WPP (from 5.8%) and 6.5% at Publicis Groupe (from 5.6%). At the margin level we now stand above company guidance at Publicis at 16.9%, and within company guidance for WPP at 13.7%. We increase our FY21 EPS by 3% for WPP and Publicis. We Rate Publicis and S4 Capital Outperform, WPP Underperform We continue to like Publicis, which in our view offers the best value proposition among its peer group, while WPP''s strategy remains to be proven and several of its accounts are under...
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We hosted an Expert Event with MDC Partners and The Stagwell Group on walled gardens Last week we had the opportunity to host MDC Partners and The Stagwell Group with Mark Penn and senior management teams. While we discussed the opportunities arising from the MDC Partners/Stagwell Group combination, we also gained insight how management sees walled gardens, what the rules are for playing in them, how they impact the ad landscape, and how they can help brands today and in the future. The increasing complexity of walled gardens Walled gardens refer to a range of technology or media information restricted to subscribers to a particular service. One key element highlighted in the presentation was the increasing complexity of the walled garden environment, with a growing number of products and services (Google has 300+ products across seven categories, while Facebook''s consumer offering has expanded to dating, marketplaces, gaming etc), leading to service overlap and competition. Marketing intermediaries and agencies crucial interfaces between brands and gardens While walled gardens'' service offerings are increasing, MDC senior management explained that agencies play a critical role with brands, helping them to navigate the products and ecosystem and implement marketing strategies in the walled garden environment and grow their business through them safely (privacy, brand safety, product launch, branding, efficient media investments etc). Read-across for advertising holdcos and S4 Capital While the presentation highlighted that smaller players, who are more agile, have an advantage in winning business related to walled gardens from the brands, we also believe that the advertising holding companies have a crucial role to play in helping their clients to navigate through the walled gardens'' increasing complexity. This supports our view that disintermediation risk is easing. As for S4 Capital, whose organic growth is closer to GAFAs than the...
GroupM’s latest global advertising spend forecasts suggest a very strong (and better than previously anticipated) bounce in 2021(+19% YoY) and a 6% CAGR 2021-26. Growth is forecast across all major geographies and most categories, with the now well-established pattern of digital driving the market clearly evident. We regard WPP, Future and Mission Group as prominent beneficiaries of rising digital spend, while ITV and STV should benefit from an overall recovery and VOD advertising growth. Ocean Outdoor also looks extremely well-positioned within the fast-growing digital Out of Home segment.
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AA / WARC’s advertising spend data for 2020 and forecasts for 2021 and 2022 expect a strong bounce (+15% and +7% YoY in 2021 and 2022, respectively) and continuing structural growth in digital spend. We regard WPP, Future and Mission Group as prominent beneficiaries of increasing digital spend, while ITV and STV should be able to capitalise on an overall recovery and drive VOD advertising revenues. Ocean Outdoor also looks very well-positioned to benefit from growth in the digital Out of Home segment.
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The mojo''s back. The beats keep coming, and the challenges of the past year have forced a healthy round of cost-cutting. With the agencies now more focused, on the up, and ready to strut their stuff in a post-lockdown world, surely it''s time to buy into their story? It''s complicated. True, as mobile and e-commerce continue to grow, relationships with clients evolve, and Chrome''s third-party cookies come to an end, agencies will have new chances to shine. But as we show in this report on current and coming trends, competition is also about to get a lot more intense. On execution risk, less exposure to growth opportunities and less-favourable asset mix, we downgrade WPP to Underperform. At Publicis we see more to come, especially from Epsilon and Sapient, and stay Outperform.
Strong 1Q LFL
Self-help and macro recovery
Our discussions with stakeholders across OOH, Exhibitions and TV, supported by fresh data from our proprietary OOH and Exhibitions databases, reveal a strong mid-term outlook once the tricky post-Covid period is navigated. We upgrade INF to (+) from (=), DEC to (=) from (-) and reiterate PSM, SAX and PUB as key (+). Rediscovering the joys of Exhibitions Digital is here to stay, but face to face will remain the core offering. Now leaner and more agile, we see mid-term margin upside risk for the space. And though 2021 may remain wobbly, our pulse checker points to strong pent-up demand. With the downside now limited, we upgrade Informa to OP, forecasting an adj. EBITA recovery to 2019 levels by 2023 helped by a slimmer cost structure. Digital OOH promising, but too far out to make the bet The media channel, which saw the sharpest decline in 2020, is also expected to rebound the strongest over the next couple of years, with the recovery path depending on the market and the medium. While the digital transition will add fuel to the equity story and drive the capex trajectory, incremental programmatic DOOH remains too small for it to be a catalyst at this stage. Stroer remains an exception - our proprietary TAM assessment points to further upside. There''s plenty to watch on TV... though not all of it is good The surprise of the broadcasters'' positive Q4 despite tougher comps led to a surge of hype around them. However, with markets slowly reopening and supply/demand dynamics shifting we expect negative historical trends (e.g. audience fragmentation) to return. While this may be gradual, particularly given comps remain easy, we expect the medium-term bearish thesis to reassert itself in the future. Potential levers to improve the outlook include addressable TV and MandA speculation. Play the recovery via Informa - we see c30% upside EPS momentum, valuation track record, business model strength, revenue mix, pent-up demand and share price traction all...
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We were pleased to note the robust financial performance, operational momentum and positive outlook assessment detailed in WPP’s FY20A results and our fundamental view of the company and its prospects remains firmly positive. That said, we believe its stock has now moved into fair value territory based on our updated forecasts and following a period of strong share price appreciation (+92% over 12 months). We have therefore decided to moderate our long-standing BUY recommendation to HOLD.
Better momentum vs FX mark to market
WPP reported FY20 results slightly above expectations In the context of a tough year, the results proved reassuring with organic revenue growth in Q4 at -6.5% versus cons at -7.8%. For the full year revenues were in line, however margins came in 4% ahead of consensus and EPS 5% ahead of consensus on the back of continued strong cost management performance amid the pandemic. Company reiterated outlook of a rebound in growth and margin from a COVID impacted 2020 Company reiterated previously announced guidance, expecting a mid-single digit like-for-like net revenue growth for FY21, coupled with margins in the range of 13.5% to 14%. Capex guidance was unchanged at GBP450-500m. The company also expects a net working capital outflow of GBP200-300m, reflecting the normalisation from the strong position at the end of 2020. GroupM and changing data environment a focus during the conf call with management While questions were asked on business and clients'' momentum, management highlighted that the absence of sequential performance at GroupM was due to a better than expected Q3 and a rather in-line Q4. On the changing data environment, WPP CEO outlines this will tend to benefit the larger platforms and disadvantage the smaller publishers and intermediaries. For WPP, he stated it''s a neutral to net positive. We cut our EPS on a strengthening GBP We updated our model for the negative FX impact in 2021, which mostly explains the downgrades. We slightly upgrade our organic growth expectations for next year (from +4.3% to 4.4%). We therefore cut our FY21/22 EPS by 8%/7%. We lower our target price from GBP790 to GBP760. We remain Neutral on WPP While the rebound seems well understood, we remain Neutral on the back of structural challenges not going away and execution risks related to the transformation strategy.
In 2020, the decrease in organic net revenue (-8.2%) and the headline operating margin (14.9% of net revenue) were in line with guidance. The reported losses were due to huge impairment charges related to old acquisitions whose carrying values had to be reassessed. The return to organic growth is expected as from Q2 21 on the back of the better economic outlook and the development in digital advertising. The headline operating margin is expected to be 13.5-14% of net revenue in 2021.
FY figures all slightly better. Debt much better
The IPA’s latest “Bellwether report” on UK marketing spend intentions shows a contrast between a very challenging 2020 (although Q4 saw some signs of improvement) and a more optimistic picture for the current year. Specifically, it flags that a net 12% of respondents expect total marketing budgets to be revised upwards with mass vaccination a key factor. Across our Media sector coverage universe, we would cite WPP, ITV, Future, STV and Mission Group as key potential beneficiaries, with Ocean Outdoor and M&C Saatchi amongst other interesting advertising spend recovery plays.
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With most of our Media coverage stocks posting material share price gains through H2 2020, we thought it would be useful to highlight the extent to which their income attractions could also develop. Our conclusion is that many sector constituents offer attractive, well-covered yields and substantial income growth potential. With mass vaccination programmes underway and many companies set to benefit from self-help initiatives, we also expect these income dynamics to contribute to a strong total return proposition. Specifically, STV, ITV, Wilmington, WPP and Moneysupermarket.com offer particularly substantial dividend yields and should also generate strong income growth.
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LFL sales growth credibility is vital for the WPP investment case from here. Post some better recent CMD disclosure, we focus on LFL net sales growth (revenue less pass-through costs) targets and ability to deliver, plus implied valuation. Near-term ‘recovery’ growth is doable given easy C-19 comps
With lockdown measures once again in place across the UK, 2021 has got off to a rocky start but we are optimistic that mass vaccination combined with the substantial self-help initiatives undertaken during 2020 will lead to positive returns for Media stocks as the year progresses. Our core Buy recommendations are WPP from the FTSE 100, Future from the mid-250 and STV Group and OnTheMarket from the small cap arena.
WPP’s capital markets session provided a reminder of the significant progress made in repositioning the business and an encouraging insight into its plans to drive revenue growth and profitability. We believe the group is well placed to capitalise on an improving advertising spend outlook and a growing opportunity to add value to its clients and, based on updated estimates, regard its stock as attractively valued. BUY.
In Q3 20, the decrease in organic net revenue slowed sequentially (-7.6% vs -15.1% in Q2 20). The recovery was driven by all the entities within the Global integrated agencies (75% of net revenue) and the Public relations activities. WPP posted the best results in the US, the UK and Germany. On the cost side, the Group is expected to achieve the high range of cost savings.
In this report we highlight four companies from across our Media coverage universe that, in our view, have the potential to generate attractive investment returns as the final quarter of a tumultuous year proceeds, and one company where we retain significant valuation concerns. On the BUY tack our core picks are WPP from the FTSE 100, Codemasters from the mid-cap space and two smaller cap names: STV and Mission Group. In contrast, we reiterate our SELL recommendation on Rightmove.
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WPP’s interim results detailed a relatively resilient performance in view of the severe impact of COVID-19 on Q2 advertising spend and flagged early signs of improving conditions. Importantly, they also provided a reminder of the group’s financial strength and the opportunity to drive growth by adding value to clients within the context of an increasingly complex media landscape. We continue to regard the group’s stock valuation as undemanding and see good scope for share price appreciation. BUY.
WPP delivered H1 results ahead of expectations In the context of COVID-19 led disruption, WPP reported an under pressure Q2 which was ahead of expectations. Q2 organic revenue growth (less pass through costs) at -15% was ahead of consensus at -19% with US/Germany stronger at -10%/-12% but UK weak at -23% and PR segment solid. Operating margin was stronger than expected at c8% vs Consensus at 6% driven by strong cost savings. Outlook implies an under pressure H2 The company outlook for H2 remains cautious with the company guiding for organic revenue and margin in line with consensus despite the H1 beat. The company, assuming no further lockdowns in key markets, expect organic revenue less pass through at -10% to -11.5% (cons at -11% pre H1, Exane now at -11%) and operating margin at 10.4%-12.5% (vs cons at 11.6% pre H1, Exane now at 11.7%) which is in-line with consensus. July at -9% offers some encouragement although trends are mixed geographically (e.g. Italy positive but Spain and China still very negative). Good cost action supports margin; we upgrade our forecasts The group delivered strong savings of GBP296m in H1 and expect cost savings to be at top end of the previously guided FY range (700-800m). The group also expects c25% of the savings to be ''permanent when return to 2019 levels of revenue''. We upgrade our FY20 forecasts significantly on the H1 revenue beat and cost performance. We also update our TP on updated forecasts and DCF assumptions. CMD to focus on industry structural dynamics and strategic progress The company will host a CMD in Q4 to update the market on strategic progress. The company highlighted three long term trends of note for the group: 1/ growing share of ecommerce 2/ rising digital share of media 3/ increasing CSR dynamic to the ad industry. We have commented on 1 and 2 at length in our deep dive report from March and remain cautious.
In Q2 20, organic net revenue decreased by 15.1% (o/w a double-digit decrease in European countries, -9.6% in the US). The headline operating margin reached 8.2% of net revenue (-3.7pts). The first cost savings came in Q2 20 (£296m). WPP should deliver in the high range of the £700-800m cost savings in 2020. Following the cancellation of the final dividend with respect to FY2019, WPP announced an interim dividend of 10p/share thanks to better visibility than four months ago.
We were encouraged by the positive tone of yesterday’s analyst catch up call with WPP’s new CFO, John Rogers, which reinforced our view that it is well placed to bounce back and add value to its broad blue-chip client base when market conditions improve. Based on our recently revised forecasts we estimate a fair value price of 770p suggesting c.14% upside potential. We therefore reiterate our BUY recommendation.
WPP’s Q1 update clearly illustrated the impact of COVID-19 on client spend but there were some positive take away points too. Specifically, some sectors have remained resilient, Q1 saw an impressive new business performance, the group is financially strong, and management has adopted a proactive approach to cutting costs, conserving cash and preparing for the future. Based on our re-based forecasts we believe price weakness has been overdone and have reinstated our (previously under review) BUY recommendation.
In Q1 20, organic net revenue decreased by 3.3%, o/w -7.9% in March 2020 due to the containments imposed in a large number of countries in Europe and the US. In this extremely difficult environment, WPP signed new businesses for a total of $1.0bn (Intel global account, Hasbro and Novo Nordisk media accounts for instance). WPP confirmed cost savings of £700-800m in 2020 and added additional measures such as part-time working and voluntary salary sacrifice for some categories of employees.
WPP’s FY19A results detailed a robust performance against a challenging backdrop and provided a reminder of the repositioning and self-help initiatives being implemented to drive future growth. Although trading during the last few months of the year was disappointing (vs. a strong Q3 showing), we remain positive on the group’s fundamentals, and forecast attractive three-year EPS growth accompanied by significant dividend yield support. On this basis, we believe that recent share price weakness has been overdone and overly influenced by broader market concerns. Notwithstanding market-wide caveats on the potential impact of Coronavirus, we see attractive upside potential. BUY.
In this report we highlight five stocks from across our Media coverage universe that we believe have the potential to generate particularly attractive investment returns during 2020. These are WPP and Informa from the FTSE 100, Ascential from the midcap space and STV and Mission Group from the smaller-company sector.
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WPP’s latest capital markets session provided a positive insight into how its technology strategy and focus on innovation is enhancing its competitive advantage and helping to build a platform for sustainable growth. This event also reinforced our conviction that the group’s simplification strategy is gaining traction and creating shareholder value. Against this backdrop we view its current stock valuation as undemanding. BUY.
GroupM’s newly published media spend forecasts suggest a broadly supportive mediumterm backdrop for advertising sensitive stocks both globally and in the UK. Not surprisingly, growth is expected to remain heavily skewed towards online advertising with the Outdoor & Cinema, Radio and TV segments also in positive territory, but Newspaper and Magazine advertising expected to decline sharply. Against this backdrop, our favoured advertising sensitive stocks are WPP^, STV^ and Mission Group+.
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Q3 19 was satisfactory with organic net revenue up +0.5% (vs -1.7% in Q2 19, -3.3% in Q1 19) excluding Kantar. The trend improved in all geographic areas including North America (38% of net revenue) which benefited from better advertising spendings at existing customers and a lower impact of losses of business as well. WPP does not see a deterioration in its businesses starting Q4 19 but keeps its 2019 guidance (organic net revenue: -1.5/-2%) considering the economic environment is getting worse.
WPP’s shares are currently down c. 4% off the back of Publicis’ profit warnings. We think the market is over-exaggerating the read across from Publicis, many of whose problems seem to be more firm-specific (see note).
WPP, Aixtron, Clarkson, On the Beach, Coffer Peach Business Tracker, ABB, AMS, Osram, Unite Group, Lok'nStore, Market Highlights,
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On Friday, WPP published their H1'19 results in which organic net sales growth was substantially less worse (-2%) than analyst consensus estimates (-2.8%) helped in part by improving performances in North America (-6.9%) and the UK (+0.2%). Whilst this is still obviously a business in decline, we fundamentally do not believe that the agency model is broken, more that WPP has to readjust itself to the changes that have occurred and reduce its reliance on the traditional media business to drive profits.
The good surprise was the lower decrease (better than expected) in organic net revenue in Q2 19 (-1.4% vs -2.8% in Q1 19). This reflected the continuing negative impact of the contracts lost in H2 18 tempered by new wins this year. In H1 19, the ‘headline’ operating margin decreased by 0.8pt to 11.9% of net revenue. WPP does not see a deterioration for H2 19 and is now more confident of achieving its 2019 guidance.
WPP has announced the sale of 60% of its Kantar Data Investment (i.e. market research) business to Bain Capital for c. £3.2bn, in line with expectations. The fact that the deal looks pretty much in line with what was thought and has been announced in line with the company’s previous announcement should provide confidence to the market.
WPP will sell 60% of Kantar’s shares to Bain Capital and will receive £2.5bn in cash, o/w £1.0bn should be returned to WPP’s shareholders. This operation should be dilutive (mid single-digit percentage) on 2020E ‘headline’ EPS and does not change the group’s dividend policy. Under the new shareholding, Kantar should benefit from the Bain Capital’s expertise in M&A and WPP’s investment of $400m in the technology to the benefit of WPP, which retains 40% of the shares.
WPP has formally announced the sale of a 60% stake in Kantar to Bain Capital resulting in an expected inflow of c.£2.5bn in FY20F, c.£1bn of which will be returned to shareholders. We are encouraged by this transaction which is very much in line with its re-focused strategy and is expected to accelerate Kantar’s growth and development. We will review our forecasts at the time of next month’s interims but, in the meantime, remain positive on WPP’s fundamentals and medium-term growth prospects. BUY
In these five short videos Liberum's media Analyst Ian Whittaker discusses WPP and the further reported disposals, the amount of cash WPP could potentially raise including their sale of the Kantar Business stake, which other assets could WPP to decide to sell, the operational outlook for WPP and how investors should see WPP shares.
WPP put out a press release yesterday confirming it is in exclusive talks with Bain Capital for a sale of a majority stake in Kantar, the Data Investment (market research) unit, which has been the subject of a sale process. The announcement should be taken well - the price looks in line with expectations, the naming of a specific suitor and that the company is in exclusive talks should give confidence in the transaction's completion and the closing of the deal will allow WPP to significantly reduce its debt.
Liberum's most insightful and high-value research and commentary published this past week.
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We see an increasing possibility that WPP may be broken up, either self-initiated or from outside intervention. There is an increasingly strong rationale for such a move, which would create significant shareholder value with a number of assets likely to attract premium valuations because of their strategic importance and / or "trophy" status.
There was no surprise in the negative trend of organic net revenue in Q1 19 (-2.8%). The North American activities weighed significantly (-8.5% organically) due to the negative impact of the losses of contracts in 2018. WPP is still targeting lower organic net revenue in the range -1.5/-2% in 2019.
WPP reports its Q1 trading update next Friday (26th). We forecast Q1 organic net sales (or revenues less pass through costs) of -2.2%, with North America the main driver of the declines, down an expected -9.5% yoy due to the loss of accounts including a large chunk of Ford.
2018 results were slightly better than expected but the focus was always going to be on what WPP said on 2019 and there the commentary was more positive than would have been expected. While the FY19E revenue guidance is in line with expectations, WPP's margins should hold up better than we would have thought.
Although 2018 was a poor year, the decline of organic net revenue (-0.4%) and the decrease in the ‘headline’ operating margin (-1.1pt) were in line with guidance which was reassuring. A positive turnaround is not awaited in 2019 as WPP is expecting a decrease in organic net revenue (-1.5-2%) and lower ‘headline’ operating margin (-1pt) on constant currency and excluding the impact of IFRS16.
WPP reports FY18 results tomorrow (March 1st). We would expect a cautious message on 2019 with FY18 organic net sales forecast to be down 0.5% and operating margin ex-associates down 90bps yoy.
WPP presented a new plan for 2019-21 in order to renew with growth. The medium-term targets include amongst others organic net revenue growth in line with peers and a headline operating profit margin (excluding associates) of at least 15% of revenue by the end of 2021. Furthermore, it was confirmed that the future of Kantar should be with a strategic or financial partner and WPP as a minority shareholder. The final decision is due to be announced in Q2 19.
WPP’s Capital Markets Day should mark, to paraphrase Winston Churchill’s comments on El Alamein, the end of the beginning for the problems that have hit WPP over the past two years. While it is clear there is no quick recovery the investor day did demonstrate that WPP is not an organisation that is falling apart, that structural fears have been over-egged and that the partial sale of the Kantar business should help significantly ease balance sheet concerns. In the meantime, investors are being paid what is in effect, a guaranteed c. 7% dividend yield from a business that has little UK exposure (c. 15%) and is a beneficiary of the recent £/$ weakness. Reiterate Buy.
We give a cautious welcome to the new strategy announced this morning but feel it could have been more ambitious and wide ranging. We will hear more at the CMD later today but our initial view is that WPP is taking the approach RELX took post its problems in 2008/2009, namely recognise the share price will not see much of a recovery short term, focus on running the business and accept the need to deliver to re-rate. Therefore, we do not see much of a catalyst for the shares short-term.
WPP hosts their Capital Markets Day tomorrow. We expect the focus to be on five areas (1) restructuring their units, which is already happening; (2) cost savings, where we see an annualised saving of £500m+ costs (with appropriate restructuring charges) as entirely feasible; (3) a possible elimination or, at least, significant cut in the dividend to fund the reduction of net debt and / or M&A; (4) disposals of part of the Kantar group and (5) possible news around M&A direction. While short-term, we realise catalysts may be limited, we do see longer-term value and think WPP will (eventually) come out of the other side.
Q3 18 was indeed a poor quarter. Net organic revenue decreased significantly, -1.5%, while a stabilisation was expected. WPP was affected by a deterioration in its activities in North America and the UK essentially. 2018 guidance is revised downwards. Lastly, management has decided to dispose of a majority stake in Kantar.
The WPP Q3 trading update conference call highlighted that the company’s recovery is not likely to come soon with 2019 set to be a difficult year and the company highlighting the need for significant investments. The contrast with comments from other Agency groups suggest that much of WPP’s issues are company specific than industry wide and that provides optimism, as WPP (eventually) is likely to turn things around. In the meantime, though, we cut estimates, by c. 15% for FY19E on a stated basis, even higher when adjusted for FX changes. However, at < 8x next year’s earnings, the shares are effectively pricing in a secular decline when it looks like the company’s issues are more specific in nature and, crucially, can be turned around. We cut our Target Price from 1750p to 1375p.
WPP missed Q3 net sales (or revenues less pass through costs) consensus, posting -1.5% vs consensus +0.4% / Lib. Est. +0.3%. As a result, WPP has taken down its revenue and margin guidance for the FY. This, and that the other Agency groups have posted generally well-received Q3 results, will raise questions over WPP’s specific issues. North America looks to be the main culprit, with Q3 Advertising and Media net sales down 4% but what is more concerning is the language suggest significant client losses in Media, which is the highest margin business, in both the UK and North America. Separately, the long standing FD is to step down next year while the company has formally announced its intention to sell a stake in Kantar, its market research division, which is a positive but unlikely to offset the news today.
Ford has announced it has appointed an Omnicom agency as its lead creative agency, moving it from WPP. While this is a blow to prestige, the actual financial impact from the loss is limited and, in some ways, may provide a relief that the overhang is gone.
The news that US Federal prosecutors are looking at the media buying practices of the Agencies will raise concerns over these companies again. Our view is that the probe is likely to focus specifically on the digital parts of media buying, and not the wider space, and especially around how rebates have been given. In the short-term, it is likely to be another reason for investors to avoid the Agency space. We reiterate BUY on WPP (TP, 1750p) and Publicis (TP, €65).
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Although organic net revenue growth improved in Q2 18 (+0.7%) vs Q1 18 (-0.1%), it was tempered by easier comparatives in Q2 vs Q1. Furthermore, the decline in the headline PBIT margin by 0.4pt of net revenue in H1 18 is representative of the year 2018, while a flat margin was expected previously. Finally, the best news was related to contract wins which reached $3.2bn since January 2018, slightly above $2bn net of major clients’ losses.
1H results were slightly better at the top-line, and slightly worse at the margin level than expected. The focus is likely to be on the changes though to guidance both FY and longer-term, and WPP’s promise of a Strategy Update before the end of the year, which raises the question of what will happen to the Market Research assets in particular. Our view continues to be that the Agency model is, longer-term, still solid and that, while changes are required, this is not a broken industry. Reiterate Buy.
WPP reports their 1H results tomorrow with two points of focus (1) the 1H results themselves, where we would expect WPP to report 1H organic revenue growth of +0.4%, implying Q2 at c. +1% and (2) the debut of Mark Read as the new CEO of WPP, which we see as a positive. We would expect WPP to be reasonably confident about both its performance, with recent account a boost, and the secular issues facing the Agencies. At a consensus 10.4x FY19E PE / 4.9% dividend yield, we think the share price does not fully reflect the value in the business.
Dentsu last night reported strong Q2 organic revenue growth of +5.9%, helped by a 8.4% organic revenue growth rate in Japan. So far, in Q2, two of the major global ad groups have reported mid-single digit organic revenue growth rates with only Publicis really disappointing and WPP yet to come. On the latter, WPP’s account win at Mars where it consolidated the global media and planning spending is a big boost and we estimate should help organic revenue growth by 40bps-50bps on an annualised basis.
In these five short videos Liberum's Media Analyst, Ian Whittaker, discusses the recent results of media agencies Omnicom and Publicis, and how these will effect the sector in the second-half of the year. He also looks at the reasons behind the slowdown in organic growth, the implications for WPP within the sector and why secular threats have been overdone. Click the image below to watch the videos.
California has passed its own version of GDPR, which comes into effect in 2020 and gives consumers significant new powers over the usage of their data and whether it is kept. Crucially, it also backs these rules up with financial penalties that can quickly ratchet up. While this law does not come into effect for 18 months, it has potentially very significant implications for digital advertising companies, the tech giants such as Facebook and those who hold data.
Interpublic (NR), one of the big four Agency groups, is reportedly close to buying Acxiom's Marketing Solutions business. Acxiom is a US firm that predominately supplies data and analytics on households for direct marketing and Customer Relationship Management (CRM) work. The $2.2bn reported price would represent c. 3x fiscal year 2018 revenues and 9x EBITDA with the business having a 35% margin. What the deal is likely to lead to is more debate about the need to own data in a GDPR world, especially with signs that the US may be moving the same way (California has introduced its own version of GDPR).
WPP reported a positive 4 months performance in its AGM trading update statement. 4 month like for like revenues less pass through costs (the go to number) were up marginally for the 4 months vs -0.1% for Q1, suggesting April at up to +1%, with WPP suggesting strong growth in Continental Europe, Latin America and Asia Pacific (although North America showed no improvement in April and is still tough). Nevertheless, the fact that the 4 months is now positive plus signs that Media Investment, which is the key to WPP’s profitability, is still showing good growth will be seen as reassuring and give more confidence in WPP’s guidance of flat like for like revenues ex-pass through costs and flat margins.
The FT mentioned several candidates for the WPP CEO job, including Unilever’s Keith Weed and ex-AOL CEO Tim Armstrong. We also think Jerry Buhlmann at Dentsu Aegis should be added to the list. However, we think there may be an argument for saying that WPP should go down the internal route to minimise the risk of disruption. In that case, Mark Read would appear the favoured candidate. Separately, there is a speculation that ex-CEO Sir Martin Sorrell is interested in being involved in acquiring Kantar, WPP’s market research division, and we think a tie-up with private equity is the most likely option if he does make this step.
In Q1 18, WPP reassured the stock market with a very slight increase in organic total revenue (+0.8% vs +0.2% in Q1 17) and practically flat organic net revenue in line with expectations (-0.1% vs +0.8% in Q1 17). WPP is looking for a new CEO amongst internal and external candidates and hopes to close the search quickly.
WPP’s Q1 results presentation was reassuring, appreciating the challenges to the business while maintaining that the fundamental business model of the Agencies was sound. We think top-line guidance for FY18 looks conservative and, with the potential for asset sales, we think WPP shares should start to close the discount they have with other Agency groups on valuation and performance. Reiterate Buy.
WPP’s Q1 trading update was better than expected with net sales down 0.1% organically vs expectations of -0.9% and comments on the crucial Media part suggesting it continues to trade “well”. Together with the press reports that WPP is looking to sell its Market Research assets, the numbers should help the shares and start to close the >30% underperformance YTD against the best performing Agency group Interpublic (NR).
WPP’s new joint COO, Mark Read, sent out a memo to staff giving the views of himself and Andrew Scott, the other joint COO, on the direction of the company. The statement would seem to rule out a complete break-up of the company but we do not think it precludes asset sales. It also looks as though WPP has moved quickly to reassure clients. We think the valuation / performance gap between WPP and the other Agencies is likely to close and recent Agency results should provide reassurance.
In these four short videos Liberum's Media Analyst, Ian Whittaker, looks at the potential ramifications for WPP following the resignation of Sir Martin Sorrell.
Sir Martin Sorrell's resignation as CEO of WPP will raise speculation about the future of the group. We think there is a significant possibility that WPP will now sell its Data Investment i.e. Market Research unit, and possibly PR, but that the rest of the group will be kept. This should drive a closing of the gap between the valuations and performance of WPP and the other Agencies.
One outcome of the investigation may be to bring closer a sale of WPP's Data Management (i.e. Market Research) unit, which Sir Martin has been a keen supporter of keeping but where there has been questioning of why WPP retains the asset given the issues in the market research area. The unit generates 15% of WPP's net sales and profits and, at a 10x multiple, would generate c. £3.5bn which WPP could use to pay down debt and / or do share buybacks and which we think would boost sentiment. Reiterate Buy, 1750p Target Price based on a DCF (8.8% WACC, 2.0% terminal growth rate).
Liberum's Media Analyst Ian Whittaker provides a round-up on the Media sector post the results season, noting investor reactions, the interesting points from TV and the reaction to agency stocks in general. Click the image below to watch the videos.
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In these four short videos Liberum's Media Analyst Ian Whittaker addresses some of the concerns over WPP's recent share price fall and asks whether the concerns are justified, if WPP's media work is under threat and why agencies represent a good buying opportunity.
WPP’s shares fell more than 8% yesterday in what we think is an overreaction to what the company reported and said in their presentation. While there are minor downgrades, these are driven more by nonoperational issues (e.g. interest, FX). We think the market has read too much into the downgrading of WPP’s long-term guidance which, as the company admitted, there was no real trigger to do and that it could have maintained it. We are in the Agencies camp when it comes to the structural threats – we think they have been overdone and weakness is more driven by non-structural factors. At 10.7x FY18E adjusted PE, we reiterate the Buy, with a new 1750p Price Target.
Disappointing FY17 results, although widely anticipated, but most of all a disappoining FY18e guidance with new measures required to adapt to a fast-moving environment. Our model is under review with valuation metrics and target price to be cut.
WPP results were broadly in line with expectations and we would not expect revisions to consensus estimates today. While WPP has downgraded its longer-term annual targets, this is already priced in to both our forecasts and the consensus. WPP, like the other Agency groups, has said that 2017 was impacted by cyclical, not structural, factors and we fully concur with this view, with the structural concerns being overdone and the current c.11x adjusted FY18E PE looking attractive. Reiterate Buy.
WPP reports FY17 results on Thursday (March 1st). The focus is likely to be on the outlook, and we think WPP is likely to reiterate the message that other Agency groups have stated i.e. that 2017 was impacted by cyclical, not structural, factors related to ad hoc project work and that 2018 should be a better year, although it is unlikely to give a specific organic revenue growth range. At 11.2 consensus adjusted FY18E PE, the shares look attractive. Reiterate Buy.
WPP rose another 3.6% yesterday, on the back of Interpublic’s (NR) FY results (IPG rose over 10%) where the key highlight was their view that 2018 would be a more positive year than 2017. All three Agency groups that have reported so far have given the same message and, with Omnicom (NR) reporting today, we expect there to be four out of four. The comments have helped make WPP the best performing FTSE100 stock in the recent correction but we see more to go and, at 10.8x FY18E adjusted PE level, the stock looks incredibly cheap, with our target price suggesting c.31% upside.
WPP has been one of the two best performing FTSE100 stocks in the recent correction (the other is another media stock, Just Eat) driven by positive comments from Publicis (Hold, TP €68) and Dentsu (NR), suggesting that 2018 will be a better year than 2017. We think the comments add weight to arguments that the structural concerns on the Agencies have been overdone. If this is correct, then the correct multiple of 11x for WPP looks too low and represents a buying opportunity. Interpublic (NR), another Agency group, reports today so their comments should provide further visibility.
In the last of our series of interviews with Sir Martin Sorrell, Liberum's Media team asks why Google and Facebook should be classed as ‘media companies’.
In the fifth in a series of interviews with Sir Martin Sorrell, Liberum's Media team ask about WPP’s digital expansion, and whether retrospectively he would have done anything different.
In the fourth in a series of interviews with Sir Martin Sorrell, Liberum's Media team asks: how does WPP revolutionize its cost base? Click the image below to watch the video.
In the third in a series of interviews with Sir Martin Sorrell, Liberum's Media team asks what the main barriers to organic revenue growth and margin increase are.
In the second of a series of interviews with Sir Martin Sorrell, Liberum's Media team asks, in the consultancies versus agencies debate, what do consultancies lack?
In this first of a series of six video interviews, Sir Martin Sorrell discusses in depth some of the challenges and opportunities for WPP. We ask him why he sees organic revenue growth pressure for WPP as cyclical rather than structural.
WPP reported a poor 9 month trading statement with a reduced FY17e guidance. Q3 revenue (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) were up 1.1% to £3,649m and down 2% organically while net sales declined by 1.1% organically (after H1 17 at -0.5%), mainly impacted by North America declining by 5.1%. For the 9-month period, consolidated revenues decreased by 0.9% organically. Note that this has to be read against a tough basis of comparison (9 month 16 organic top-line trends were c.+4%) and still reflects the FY16 contract losses (mainly AT&T in November 2016 and VW in January 2017) as well as low FMCG spending. As, we believe, widely anticipated by the market, the FY17e guidance was cut for organic revenue and net sales to be flat (instead of growing between 0% and +1%) with a headline net sales operating margin now anticipated to be flat at CER instead of improving by +30bp….
WPP has just reported H1 17 revenue figures (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) which were up 13.3% to £7,404m, a 0.3% organic decline (was 4.3% in H1 16) offset by an 11.4% positive impact from forex and +2.2% from acquisitions. Net sales were down 0.5% organically (were +0.8% over Q1), implying a tough Q2: July was bad with net sales down 2.6% organically, below internal budget (cumulative organic net sales growth for the first seven months is -0.8%) and Q2, indeed, suffered from pressures on client spending namely in the FMCG sector The reported net sales margin reached 13.9%, up 20bp from the 13.7% level a year earlier and flat at CER. The headline diluted EPS rose by 16.1% to 45.4p (+2.4% at CER) while the interim dividend is raised 16.1% to 22.7p (i.e. a pay-out ratio of 50%). Following these disappointing Q2 results, the FY17e forecast has been revised down further. WPP now anticipates organic revenue and net sales growth between 0% and +1% instead of the previous “around +2%”. Positively, the headline net sales operating margin target improvement remains unchanged at +30bp at CER.
WPP’s Q1 17 revenues (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) rose by 16.9% to £3,597m. They were up 3.6% at CER (reflecting the continued weakness of sterling against most currencies: forex impact of +13.3%) and +0.2% organically, therefore slightly outperforming competitor Publicis (-1.2%) and Havas (+0.1%) but behind Omnicom +4.4%. Consolidated net sales (after direct costs, i.e. a better indicator for underlying performance, although not used by competitors…) improved by 18.5% after a 13.7% positive impact from currencies and improved by 0.8% on an organic basis. The Q1 profits and margin (which are not released at this stage) are said to be “well above budget and ahead of last year”. The FY17e guidance remains cautious for an “around 2%” top-line organic growth with a stronger H2 partly helped by easier comparatives (H2 16 at c.+2% after H1 16 at c.+4% for net sales). Management said that this includes the recent Unilever and P&G announcements of cutting their marketing budgets… The headline operating margin on net sales target remains at a 30bp improvement at CER (off a constant currency base margin of 17.3%). Coming as a positive, the net new businesses is improving, having risen by 18% compared to last year to $2.1bn.
WPP reported solid FY16 results, in line with our expectations, with reported revenues (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) up 17.6% to £14,389m (AV was £41,441m). This was after +4.2% from acquisitions, +10.8% from forex (sterling weakness; only c.15% of revenues in the UK) and +3% organic growth. Net sales (after direct costs, i.e. a better indicator for underlying performance, although not used by competitors…) rose by 17.4% to £12,398m (+3.1% organic). The headline OP amounted to £2,160m (+21.8%; +8.5% at CER), reflecting an operating margin of 17.4% of net sales (AV was 17.3%), up 50bp from FY15 but 20bp at CER, i.e. under last October’s target of +30bp at CER. The headline diluted EPS rose by 20.9% (+7.7% at CER) to 113.2p, 2% above our 111p forecast, while the proposed final dividend is raised 28.7% to 37.05p (implying a total dividend of 56.6p versus our 53.2p expectations, up 26.7% with a payout ratio raised from 47.7% in FY15 to 50%). Management highlighted an “above budget start” to the year with organic revenue up 1.5% in January (against a strong comparison basis: +4.2% in January 2015) but the cautious top-line organic guidance appears disappointing at only “around +2%”. Positively, the headline operating margin on net sales target is, as usual, for an 30bp improvement at CER.
WPP reported Q3 revenue (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) up 23.4% to £3,611m, a 3.2% organic improvement (after +4.3% in H1 16 but on a stronger basis of comparison) and after +4.4% from acquisitions and +15.8% from forex (sterling weakness; only c.14% of revenues in the UK). Net sales were up by 2.8% organically to £3,114m (H1 16: +3.8%). For the 9 month period, consolidated revenues rose by 3.9% organically and net sales by 3.4%. Not reporting its full results at this stage, WPP nonetheless specified that the 9 months operating margin was up by 40bp on a reported basis (+30bp at CER) with staff costs being well under control. The target for +30bp at CER for the full-year was reiterated (with an additional 10bp boost likely from forex), despite the traditional caution on Q4. The group still expects like-for-like revenue and net sales growth up by over 3%.
WPP reported revenue (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) up 11.9% to £6.54bn, a 4.3% organic improvement (similar to H1 15’s performance) and after a +3% forex impact (sterling weakness as only 14% generated in the UK) and +4.6% coming from acquisitions. Net sales were up 3.8% organically (were +3.2% over Q1), with a reported figure of +11% after forex (+2.9%) and perimeter impact (+4.3%). The reported net sales margin reached 13.7%, up 40bp on the same period last year (+30bp at CER), increasing the credibility of the +30bp full-year target at CER despite the tougher economic environment. The headline diluted EPS rose by 16.7% to 39.1p while the interim dividend is raised 22.9% to 19.55p (i.e. a pay-out ratio of 50% from 47% in H1 15, ahead of the FY17 target). July’s net sales growth rose by 1.9% like-for-like (or +3.5% for the first seven months), i.e. ahead of budget with the UK being “stronger than the previous quarter” (maybe a post-Brexit vote recovery according to CEO Martin Sorrell who, nonetheless, still considers the country might fall into recession). The FY16e guidance is for revenue growth “well over 3%” (raised from “over 3%”) and net sales growth “over 3%” with a slightly weaker H2 than H1 (high basis of comparison + clients remaining cautious).
A good Q1 performance showed year-on-year net sales growth slightly ahead of budget at 3.2% (constant currency, like-for-like), with the US, UK and Western Continental Europe in the vanguard. 2016 is set to be a strong year for advertising, with the normal even year effect boosted by the forthcoming Rio Olympics, UEFA Euro Football Championship and US presidential election. WPP’s strong forecast earnings growth, 12% CAGR 2015-17e (in a 10-15% target range), provides scope for rating expansion.
WPP Plc WPP Scangroup Plc
WPP’s Q1 16 revenues (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) rose by 10.5% to £3,076m. They were up 9% at CER and +5.1% organically (Q1 15 was +5.2%), therefore outperforming competitors (Publicis: +2.9%, Omnicom: +3.8%, Interpublic: +6.7%, Havas: +3.4%). Consolidated net sales (after direct costs, i.e. a better indicator for underlying performance, although not used by competitors…) improved by 6.7% at CER and +3.2% on an organic basis (Q1 15 was +2.5%). The Q1 profits and margin (which are not released at this stage) are said to be “well above budget and ahead of last year” and the FY16e guidance remains unchanged for an above +3% organic net sales growth and +30bp operating margin improvement (staff costs/net sales ratio improvement), with H2 expected to be stronger than H1 (bonus of the maxi-quadrennial events, usually adding c.1% growth to global advertising market). The full-year impact of forex, if rates were to remain at current levels, would be +3-4% on both revenue and net sales (was +1.5% on revenues and +1.4% on net sales over Q1, reflecting the weakness of sterling against the dollar and the euro).
For its 30th anniversary WPP reported FY15 results globally in line with our expectations, with reported revenues (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) up £706m to £12,235m (+6.1%) supported by a +5.3% organic performance and despite a 1.4% forex headwind. Net sales (after direct costs, i.e. a better indicator for underlying performance, although not used by competitors…) rose by c.£460m to £10,524m (+3.3% organically, with mature markets up 3.4% and fast-growing markets up 3%; negative forex of 1.2%). The headline operating profit amounted to £1,774m (+5.5%; +8.7% at CER), reflecting an operating margin of 16.9% of net sales, up 20bp from 2014 and +40bp at CER, i.e. slightly above the group’s guidance (+30bp at CER). Net profit and EPS were also in line and the full-year dividend, up 17% to 44.7p, reflects a pay-out ratio of c.48% from 45% a year earlier, close to the newly targeted ratio of 50% in FY17e (which likely to be achieved in FY16e by the way). Management highlighted an “above budget start” to the year with organic revenue up 4.2% and net sales up 2.3% in January despite an unfavourable basis of comparison (+6.7% and +3.9% respectively in January 2014). The guidance for FY16e is for “well over” +3% organic revenue growth and net sales growth of over 3%, with headline operating margin on net sales target improving by 30bp again, at CER (helped by an improvement in staff costs/net sales ratio enhancing profitability as well as the ongoing IT transformation).
WPP’s Q3 15 top-line was globally satisfactory, with revenues (including the full impact of digital billings, i.e. linked to acquiring digital media space on its own account) up 5.9% to £2,927m (at CER: +7.9%; organic: +4.6% compared with Publicis: +0.7%, Omnicom: +6.3%) versus +7.6% a year earlier. Net sales (£2,518m; after direct costs, i.e. a better indicator for underlying performance, although not used by competitors...) accelerated to +3.3% organically (Q3 14 was +3%), after +2.5% in Q1 and +2.1% in Q2. Based on net sales, the operating margin positively improved by 50bp at CER (+30bp reported), i.e. above the full-year’s target which was reiterated at +30bp at CER. The guidance for FY15e organic net sales remains unchanged at >3% organic net sales growth (9 months is +2.6%), taking into account the traditional caution on Q4, with a full-year -1% to -2% expected impact on both revenues and sales if forex remains at current levels (overall strength of sterling against most currencies).
WPP reported H1 15 results roughly in line with expectations, highlighting a solid performance in July (net sales up 3.7% organically) and reiterating its full-year guidance (>+3% organic net sales growth and +30bp operating margin improvement). H2 is still expected to be stronger, partly due to a more favourable basis of comparison (tough year-to-date as H1 14 was +4.1%; H2 14 was +2.6%), a positive as H2 traditionally generates about 2/3rds of the full-year OP. The interim dividend was raised by 36.9% to 15.91p, a 47.5% payout, in line with the 50% target by end-2016e, while share buy-backs over the period amounted to £405m. Note that, at current exchange rates, the full-year currency impact would be a 1-2% decline in revenue and net sales, i.e. not very significant.
