BoAML: Publicis Groupe – cautious on Q4

Advertising agency Publicis Groupe posted 6.4% Q3 organic sales growth yesterday as revenues grew across all regions, helped by strong demand for digital ads.

Publicis’ Q3 growth was in line with Bank of America Merrill Lynch’s (BoAML) top of the range forecast, slowing from 7.6% in Q2 given tougher comparables.

Group revenues of €1419 million (+7.5%) were also in line. Net new business of $1.7 billion in Q3 was down year on year ($2.7 billion) but still strong, while digital revenues now account for 30% (vs 29% in H1). Net debt was €969 million at the end of September.

EM and North America accelerate in Q3

Q3 growth was driven by Asia Pacific (7.6% vs 5.5% in Q2, with Greater China & India greater than 10%) and Latin America (13% vs 3.7% in Q2), where growth accelerated vs H1. North America remained robust (+5.5% vs 5.3% in Q2) despite very tough comparables, while growth in Europe slowed to +6.5% (vs 11.5% in Q2) despite easier comparables and c10% growth in Germany & France.

Low single digit growth expected in Q4

Given tough comparables (Q4 2010 +12.5%), low visibility and recent cuts to market forecasts, management guided to low single digit growth in Q4. BoAML now expects Q4 growth to slow to 2.4%, leaving its full year forecast of 5.8% unchanged.

Given macro uncertainty, the bank continues to assume 2.2% organic growth in 2012.

…limiting scope for margin expansion

Management also suggested that full year margins are likely to be flat year on year, with expansion possible if Q4 organic growth exceeds 3%. As a result, BoAML has trimmed its full year margin from 16% to 15.8% (flat vs 2010), although it continues to assume 20 bps expansion in 2012. Given currency gains, BoAML’s fully diluted 2011 EPS of €2.65 is left broadly unchanged and it has now upgraded earnings by c3% from 2012.

Maintain Neutral rating; new PO of €35.6

While BoAML continues to like the agency sub-sector given exposure to digital and emerging markets, it prefers WPP (on valuation) and Aegis (given M&A). Its PO rises 2% to €35.6, in line with its earnings upgrade.