We published our sector preview last week (Looking ahead to Q3 results). This
week we have revenue announcements from Publicis and WPP, and earnings
from Telecinco, Antena 3 and Eniro. In terms of global peers, we also have results
from Interpublic (US agencies).
Ad agencies – revenues remain sluggish; it’s all about cost savings for now
We know from Omnicom and Havas numbers last week that Q3 has shown
limited improvement vs Q2, but at least that we have stabilized and are bumping
along the bottom. As a positive, the US is clearly “less worse” in Q3 than Q2. A
key theme of our research view on ad agencies this year has been the similarities
of this downturn to 2002: a September “shock” the previous year impacting
advertiser behaviour with subsequent deterioration in the first half of the following
year. In early 2002, as in the current year, robust management outlook statements
about 12m prospects gave way to increased pessimism as revenues deteriorated,
with first half revenue performance materially below initial budgets. In the second
half of 2002, although revenues started to improve, the pace of recovery was
below expectations. So far, so familiar. However, the difference this time round is
that 1) in general, industry margins have held up better than expected. 2) analyst
expectations have been more realistic (and below management guidance) for
most of this year, so agency share prices were quicker to discount the severity of
downturn starting last year than previously. Agencies are late cycle businesses, so
in our view, the driver of these stocks currently is cost saving and margins.
Moreover, if revenues remain subdued next year, then upward pressure on cost
bases remains limited and margin upside is substantial in a scenario of modest
revenue decline. We assume -7.1% organic revenue decline at Publicis for Q3 (the
company has specifically guided to relative improvement vs Q2) and -9.5% at
WPP. We are buyers of WPP (margin expansion from cost saving and TNS
synergies, FX beneficiary) and Aegis (early cycle media buying, FX beneficiary).
BSkyB (Buy) – another strong quarter – beating on KPIs and profit
While only Q1 and hence unlikely to drive changes to estimates, we see these
figures as a sound start to the year, with Sky delivering strong subs growth AND
strong profits, with plenty of "runway" left. Net adds (+94,000) and HD net adds, in
particular (+287,000) were ahead of forecasts. We think bottom line momentum
can only build further as HD revenues come through on a slower marketing cost
base, and broadband losses reduce. Reiterate Buy.
Mediaset (Buy) - upgrading Italian top-line forecast; raising TP to E5.4
We are seeing signs of improvement in TV advertising across Europe, and Italy is
no exception. September Italian advertising has shown a marked improvement vs
July/August. For November, we now anticipate a single-digit increase y-o-y (the
first positive month for adspend since September 2008). We estimate Q3 and
Q409 adspend at -6.5% and -1.5%, respectively (vs. -9% and -5% previously).
Allowing for slightly higher 2009 EBIT losses in pay TV (stronger-than-expected
growth in subs and SAC), the net effect is a 6% EPS upgrade in 2009. This is our
third consecutive upgrade this year. Mediaset remains one of the cheapest stocks
in European TV, on 7.6x EV/EBITDA 2010E (TV median 10.7x) with a 7% yield.