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...
