Expect continued strong EPS growth and cash generation. Reiterate as top pick in media sector
media sector. Following strong Q4 15 organic growth momentum (+4.9%)
and solid FY15 results we continue to expect good EPS momentum with 15-
17E EPS CAGR of c10% (ex impact from likely bolt-on M&A in ‘17). We
also expect continued strong EqFCF generation and shareholder returns with
2016E/17E div. yield of 3.4%/3.7% & 3% buyback in 2016E. Despite these
attractive characteristic WPP trades in line with the market on 2016E/17E P/E
of 14.7x/13.5x and an EqFCF yield (pre-bolt-on M&A) of 7.8%/8.1%. We
increase our 2016E/17E Net Income estimates by 1.3%/2.0% (Table 1) and
bring our WACC estimate inline with the rest of our large cap coverage (8.5%
vs 9.0%). However, we take a more cautious view on 2016E net debt and
share count. Net-net we increase our multiples and DCF derived Dec-16 price
target by 4% to 1,835p, implying 19% upside.
Positive 2016 growth outlook. Management sees 2016 organic net sales
growth of over 3% (JPMe 3.4% y/y) with January net sales tracking just
behind this at 2.3% y /y due to strong 2015 comp and expected phasing
during 2016 (with Euros / Olympics / US presidential election). Group M
forecasts 2016 ad-spend growth of +4.5% y/y, 110bps ahead of 2015’s rate.
Margin expansion on track with management targeting +30bps margin
expansion in 2016 vs +40bps achieved in 2015 (at cons FX). The main
drivers are costs savings from operational effectiveness and efficiency
programmes in 2016/17 (expected to deliver savings of c.£30m/£51m).
WPP acknowledged pricing pressure from the recent account reviews but
maintain its long-term margin target of 19.7% (JPMe max margin of 18.7%
in 2022E) given the significant cost saving potential still within the group.
Many different levers provide robust EPS outlook: Management
reiterated its long-term guidance of achieving 10-15% EPS growth through
four levers in 1) organic growth; 2) margin expansion; 3) buybacks; and, 4)
M&A. We note WPP achieved a 14% EPS CAGR between 1993 & 2015.
Use of cash. We expect c£400m of small to mid size acquisitions in 2016E.
We also expect WPP to achieve its 50% payout target in 2016 (3.4% div
yield) on top of a 3% buyback.