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...
