Cost inflation key theme: We expect a major shift in
behaviour from cost cutting in 2009 to opex reflation as
revenue growth resumes from 2H10. Growth will likely
be volume/activity rather than price led, requiring more
staff, higher salaries and bonuses. Margin growth limited
to +20bps in 2010 and 60bps in 2011. More broadly, fee
deflation and a shift towards pay-for-performance
models will restrict growth in per employee profitability.
We factor in a rapid economic recovery to reflect
higher estimates for GDP, corporate profitability and
consumer confidence. Average EPS forecasts upgraded
by 12% in 2012, which leads to our higher target prices.
Flat 2010: We forecast agency revenues at -1% to
+0.5% as they lag global ad growth by 1.5ppt partially
due to pricing pressure, account deflation and low
exposure to commissions; trend 4-5% growth by 2012.
Pedestrian EPS growth: Facing muted underlying
growth, higher interest rates and minorities, our base
case EPS has just 1% growth in 2010 and 12-15%
2011-12, below the market and media sector average
Underweight agencies: Despite prospect of sub-GDP
growth, valuation now at 14.5x PE, 9x EBITDA & 6%
FCF yield in 2010. EPS regains 2008 levels in 2012.
Upgrading Aegis to Equal-weight (was UW): It has
highest exposure to commissions, strong new business
and M&A speculation should continue to support shares.
Publicis remains top pick (EW,