WPP (WPP-LN): Q1 – positive spin and NNB, but organic revs of +4% only in line -HOLD

Q1 organic revenue growth of 4.0% was shy of our +4.4% forecast, albeit broadly in line with Q4’s +4.5% and WPP’s full year expectations of +4%.  By region, the most noticeable change was from N. America where u/l growth of only +1.4% lagged its peers (>+3.5%) and our estimate of +4.4%. W. Europe however at +2.5% was better than our 0% forecast, reflecting strong growth out of most Northern regions and even Italy, offsetting weaker performances out of Spain and even France (the latter at odds with results from Publicis and Havas).  Elsewhere, UK was on track at +2.5% (WYTe +3.0%) as was RoW at +9.5% (vs WYTe at +9.4%), the latter including +14.1% from LatAm.  By category, Advertising & Media remains the key growth driver at +6.2% (WYTe +6.0%),       with consumer insight (market research) continuing to struggle at only +1.3% (WYTe at +0.8%), PR at only +1.9% (vs WYTe at +3.0%) and Specialist Comms at +3.8% (vs WYTe at +6.0%). Given the growth in social media and in the run up to the US Presidential elections, the slow pace of PR comes as some surprise and is  considerably below IPG’s +8.6%, reported yesterday.  Average net debt of £2,644m meanwhile came in slightly below our £2,746 estimate.

Outlook: Q1 Net new business of $1,855m (vs WYTe of $1,279) is well ahead of last year (+38% YoY) and our forecast for Q1, although the Unilever review has yet to conclude. The Olympics, US  presidential elections and emerging markets continue to provide a fair wind to offset deteriorations across Southern Europe. The Group is reporting Q1 profits and margins are tracking ahead of budgets and last year and with full year 2012 expected to do slightly better than its +4% organic revenue growth and +50bpts EBITA margin increase to 14.8%. This however, should already be broadly anticipated by markets and compares with our existing forecasts of +4.6% organic revenues and +100bpts EBITA margin increase, to 15.3%

Valuation: A bit of positive spin by Sir Martin should keep the shares ahead, although beyond the new business wins there is not that much here that should not have already have been anticipated by the markets. With the shares trading on an operating FCF yield of approx 6.5% to discount growth at c. +4.5% CAGR, they remain fairly valued and broadly match current and prospective organic revenue growth.
Share price                                     850p
Growth rating FY14                        +3.3%
Revenue CAGR FY12-14                +4.5%
Target CAGR (FY3)                        +4.3%
Target price                                      850p
Upside                                                   0%
Recommendation:                        HOLD


Agency organic revenue growth by quarter (YoY change)


Growth Rater Analysis