* CL-Buys: Ascential, ITV, Publicis are our top picks
We add the following onto the Conviction List (CL): Ascential, for its high structural growth and M&A potential at an attractive valuation; ITV, for its content exposure, upside to consensus ad forecasts, M&A potential and low valuation; Publicis, for the turnaround potential, US exposure and prospective buyback at a low valuation. Other changes: Informa, Lagardere and Vivendi off CL; A3, JCDecaux, ProSieben, Relx NV to Buy, from Neutral; Mediaset, UBM down to Neutral; and M6 to Sell, from Neutral.
Media stocks underperformed the broader market in 2016 for the first time since 2009, as growth disappointed and structural concerns heightened. Cyclicals in our coverage have lagged the rotation, outperforming defensives by 7% since July 2016, vs. 34% in the broader market. The media sector now trades on a 16.4x 12M PE, a 7% premium vs. the market
(historical average premium of 13%) while media cyclicals present a 5% premium to defensives (historical average premium of 19%). We believe this does not price in the broad pick-up in growth, and creates compelling opportunities, given our expectations of 17%/9% EPS growth in 2017/18 vs. +12%/5% for the market, with attractive yields and FX tailwinds. As a result, we move our Coverage View to Attractive, from Neutral.
* M&A centre stage in TV, Agencies, Events, Outdoor
We believe the recent pick-up in M&A activity could continue in 2017, given the rising importance of content and scale in distribution, while a number of fragmented end-markets (agencies, events, outdoor) could benefit from further in-market consolidation. We see the most likely targets in our coverage as Ascential, Havas, ITV, UBM and Mediaset, assigning 30% M&A weightings in our price target calculations.
* Rekindling the relationship between macro activity and ad spend
Improving macro trends led by the US and EM (global real GDP growth of 3.6% in 2017E after 3% in 2016) should support ad spend. We expect agencies to be the main beneficiaries, but rising input costs could weigh on certain clients. Our regression analysis suggests the relation between macro activity and ad spend still holds, with the exception of the UK in
2016, which could point to significant upside to consensus forecasts.
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