QuickView: WPP

WPP (WPP.LSE) should achieve double-digit earnings growth in FY13, despite the mixed economic backdrop and modest forecast global adspend progress. The continuing focus on improving operating margins is targeted to yield another 0.5% to 15.3% in the current year as cost control and return on prior year investments comes through. The statement with the FY12 finals on 1 March indicated that trading in the early weeks of the year was good. A full Q1 update is scheduled for 26 April. Despite a positive share price performance, the shares look well underpinned.

Diversified geographic strength
The scale of WPP’s operations in faster growing markets insulates it from some of the concerns overshadowing confidence in more mature markets, with 30% of FY12 revenues coming from Asia-Pacific, Latin America, Africa, the Middle East, and Central and Eastern Europe. With the Sochi Winter Olympics and the World Cup coming up, group companies are well placed to benefit from associated spend.

Creativity and technology
Agency reputations have always been closely aligned with creativity, but the increasingly demanding technical environment requires extensive resource and expertise that can be a clear differentiator. Increasing the degree of ‘horizontality’ – different aspects of the business working together to provide client solutions – is a key strand of the strategy to enhance leverage and margins.

Infill acquisitions and strategic stakes
WPP continues to expand through acquisition as well as organically. Since the finals, the group has bought a creative agency in Canada, taken a majority stake in a digital agency in Thailand, broadened its position in digital through buying a stake in electronic dance music specialist SFX Entertainment and added further financial backing to a Chinese digital advertising measurement company in which it has a minority holding. Incremental deals of this type are likely to continue.

Valuation: Sector bunching
Of the major global communication services businesses, Dentsu’s shares have performed best over the last six months, catching up earlier underperformance. The other majors’ prices have moved in a very tight relative range of 15% to 17%. WPP, Omnicom and Publicis are bunched at between 8.1-8.5x FY13 EV/EBITDA, although WPP sits at a 15% P/E discount, underpinning the current share price.

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