Advertising trends
Advertising growth in Europe remains patchy. The UK remains strong and GroupM
suggests upside risk for TV giving us confidence in our above consensus forecasts
for ITV (NAR +5.5% FY15). Prosieben’s outlook for the German TV market is
unchanged (2-3%). While growth remains aneamic the ad agencies suggested there
are some signs of increased confidence in France & outdoor has seen a return to
+ve growth after losing share in Q1. Italy is mixed with JCD noting better trends but
Mediaset seeing little change (with 2Q muted but better than 1Q). The agencies
believe recovery in Spain is sustainable and Atresmedia continues to guide to TV
market growth of 7-10% in FY15 but the TV market is expected to slow in 2Q (5-6%)
given tough sports comps (particularly for Mediaset Espana). However, it is notable
that this is the first time since the financial crisis that Group M has not seen
pressure on FY European ad forecasts as it approaches the mid-point of the year.
Key theme: agency reviews – WPP / Havas preferred picks
The agencies suggested that the key driver of the unprecedented number of media
pitches (in the US) was clients ensuring they are getting the best expertise as they
migrate to digital, rather than procurement pressures. WPP described the c$30bn of
billings that are up for grabs as a "once in a life time opportunity" as it is the incumbent in
less than half. Both WPP and Havas are underweight in the US and see pitches as a net
opportunity vs a net risk for Publicis. Preparing for pitches will incur some additional cost
although WPP / Havas were confident that they could still expand margins 30bps this
year and Publicis said it could absorb the costs albeit with margins falling due to the
integration of Sapient. The risk is that re-pitching could be a drag on industry margins
next year for both those losing accounts (with the time it takes to right size variable
costs), for those retaining business should they sacrifice margin to do so and those
winning business given start up costs. We have a Buy rating on WPP, which is less
expensive than peers trading on just 12.7x 2016E PE after adjusting for tech
stakes/dividends. WPP is “best-of-breed” in our view and differentiated by its scale,
geographic mix, digital assets / Xaxis and its investment in data & technology. We are
Buyers of Havas (14.3x 2016 PE post dividend) which is seeing the best organic growth
driven by new business and has the greatest exposure to a European recovery. We are
Neutral on Publicis (13.2x 2016E PE post dividend) given Sapient integration risks and
net risks from re-pitching.
Other picks
Pro7 – where we see scope for earnings upgrades from Q4 ad share gains in, exits
& M&A, & upside from internet optionality, HD & Maxdome. Mediaset – a free
option on an ad recovery (even if it is proving elusive) & potential for a pay TV deal.
JCDecaux – structural growth, European recovery play with small cell upside.
Vivendi – where we see substantial upside from music.
ITV - good momentum,
cheap play on content / retrans . Informa – least expensive stock in the sector with
potential for perception change as it continues to turn around Business Intelligence.