Ad Agencies: revised growth assumptions
Low performance indicators and ongoing uncertainty around sovereign debt has led to downward revisions to global growth expectations, which will impact European ad agencies, according to BofA Merrill Lynch.
The group’s latest forecast unveils average EPS downgrades of c6% in 2012 (7 – 8% below consensus) and c11% in 2013 (14 – 15% below).
BofA Merrill Lynch expects the market to slowdown, rather than fall into recession. In 2012, the group has cut ad agency growth to +1.5 – 2.5%, with support from additional factors such as the Olympics, US elections, and European football, which typically add 1 – 2% to global ad growth.
However, the lack of such one-off events in 2013 suggests another tough year, according to the forecast – particularly if we are addressing US government debt. BofA Merrill Lynch has cut its agency organic growth in 2013 to +1 – 1.5%, with developed market growth assumed at close to zero.
The group currently expects the US to slip into recession (a 40% probability).
Sentiment is likely to remain weak for some time, with forecast risk high, BofA Merrill Lynch says. But share prices have moved sharply. “These are decent quality businesses in a market that, while cyclical, continues to prove resilient to structural change. Agencies also offer an attractive way to gain exposure to structural growth in emerging market consumerism.”
In the current environment, BofA Merrill Lynch advises sticking with “best of breed stocks” like WPP – “with its attractive geographic mix and exposure to digital, leading dividend yield, inexpensive valuation and strong liquidity”.
It also recommends Aegis – “reflecting the attractions of its streamlined and cash-rich business post Synovate and strategic value as the last independent agency group of scale”. However, the group has downgraded its recommendation on Havas – “despite inexpensive multiples and a strong balance sheet, its revenue mix leaves earnings more vulnerable than peers, in our view”.
The forecast says “advertising plans can change fairly rapidly and given the deterioration in macro indicators and corporate/consumer confidence, we would expect advertisers to become more cautious in their approach. We have already seen downward revisions to forecasts across European media owners and this is generally a precursor to agency downgrades (the lag reflecting agency fee structures – see chart below), although clearly agencies are much broader in reach than these media companies, both geographically and in terms of functional exposure (critically including exposure to the structural growth of digital and emerging market advertising)”.