Advertising Agencies Watch this Ad Space

Transcription

Advertising Agencies
Equity Research
April 25, 2013
Watch this Ad Space
 We are positive on the global advertising agencies over the next 12 months, as
Alex Wisch
Equity Analyst
+44 20 7176 7832
[email protected]
we expect global advertising expenditure – the main driver of the sector – to start
accelerating over the next few months. Ad forecasts by key independent market
research groups have been cut repeatedly for over a year. We argue the trough
has been reached, with upgrades likely in the near term, led by a stronger-thanexpected recovery in North America, as already evidenced in the Q1 13 reporting
season.
 The
Westcott Rochette
Equity Analyst
+1 212 438 8748
[email protected]
largest global ad agencies are also likely to benefit from their growing
exposure to emerging markets. We estimate the major emerging markets will add
USD200 billion to global advertising spend over the next 15 years as the
economies shift towards more consumer discretionary spending. Brazil, Russia
and China will account for about 29% of global ad growth over the next three
years, according to forecaster ZenithOptimedia.
 Ad
agency conglomerates also offer growing exposure to digital advertising,
which will continue to be the most dynamic area of advertising over the next
three years, in our view. Digital solutions allow agencies to tap client budgets
beyond traditional sources in advertising and promotion. Publicis generates 37%
of revenues from digital sources. Internet advertising, including search, display
and classifieds, is growing significantly faster than TV, radio, and print, and is
likely to go from 16% to 23% of total global ad spend in the five years to 2015,
according to industry forecasters.
 The top four global ad agencies in our coverage score well against these cyclical
and structural trends. We have Buy recommendations on the US-listed groups,
Omnicom and Interpublic, and also on Paris-listed Publicis, while we have a Hold
recommendation on London-listed WPP. This reflects our slightly more positive
view on ad markets in North America and emerging markets, and caution
regarding Europe. We also favour higher relative exposure to digital advertising.
Recommendations
W Europe
(% 2012
Revenues)
16.4%
20.1%
Interpublic
IPG US
13.5
USD
Buy
16.0
Dividend
Yield (%) FE 2013
14.7
2.2%
Omnicom
OMC US
58.0
USD
Buy
65.0
14.5
2.8%
3.7%
25.1%
Westcott Rochette (US)
PUB FP
50.8
EUR
Buy
60.0
14.0
1.5%
10.0%
28.5%
Alex Wisch (UK)
WPP LN
10.5
GBP
Hold
11.5
12.7
2.0%
9.1%
36.8%
Alex Wisch (UK)
Name
Publicis
WPP
Bloomberg
Price
Ticker
Cur
Rec
Target
Price
P/E
2013E
EPS 4-YR
CAGR
Analyst Name
Westcott Rochette (US)
Source: S&P Capital IQ equity research estimates, as of April 22, 2013
This report is for information purposes and should not be considered a solicitation to buy or sell any security.
Neither Standard & Poor’s nor any other party guarantees its accuracy or makes warranties regarding results
from its usage. Redistribution is prohibited without written permission. Copyright © 2013. All required
disclosures appear on the last two pages of this report. Additional information is available upon request.
April 25, 2013
2
Contents
Contents 2 Advertising outlook 2013-14 3 Downward revisions in ad forecasts coming to an end 3 Regional exposure 5 Structural changes 8 Agency growth outlook driven by emerging markets 8 Digital advertising 17 Company portraits 22 Summary of recommendations 22 Our forecasts vs consensus 22 Publicis 23 WPP 24 IPG 25 OMC 26 Disclosures / Disclaimers 30
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Advertising outlook 2013-14
Downward revisions in ad forecasts
coming to an end
Industry forecasts for global advertising
growth have been on a downward
trajectory
For the better part of the last two years, global advertising revenue forecasts have
proven optimistic and disappointed on the downside. Key forecasters like Magna
Global, GroupM, and ZenithOptimedia have revised their global forecasts for 2012
and 2013 almost every quarter since mid-2011, when the pace of the economic
recovery started to slow. In mid-2011, Magna was forecasting 2012 global
advertising growth of 6.5%, a forecast that was cut to 5.0% by end-2011, and later
to 4.8% in 2012 and finally to 3.8% by end-2012. GroupM and ZenithOptimedia
also saw a steady downward trajectory in sales estimates (see the chart below).
Evolution of Global Ad spend Growth Forecasts for 2012 and 2013
6
5
4
3
2
1
0
Mar-12 Apr-12 May-12 Jun-12
Jul-12
Aug-12 Sep-12
2012 % growth y-o-y
Oct-12 Nov-12 Dec-12
2013 % growth y-o-y
Source: ZenithOptimedia, based on statements from March 2012 through to December 2012; April 22, 2013
Evolution of Global Ad Spend Growth (%) Forecasts for 2012 and 2013
(Breakdown by Region)
Mar-12
Jun-12
Sep-12
Dec-12
2012
Global
4.8
4.3
3.8
4.1
W Europe
1.5
0.4
-0.7
0.2
N America
3.6
3.6
4.2
3.5
2013
Global
5.3
5.3
4.6
4.1
W Europe
2.6
2.6
1.7
0.2
N America
3.8
3.9
3.6
3.5
Source: ZenithOptimedia, based on statements from March 2012 through to December 2012; April 22, 2013
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We pinpoint two of the biggest culprits for the downward pressure on
projections:
1)
A challenging Europe whose economic deterioration has proven both
more severe and protracted than expected.
2)
A more modest pace of advertising recovery in developed markets than
prior cycles.
Disappointing Europe and a slower
economic recovery account for downward
revisions to global forecasts
The European economies continue to disappoint and account for the bulk of the
revisions, driven by a prolonged recession, austerity programmes, and elevated
unemployment. The macro pressures have proven too difficult for companies to
overcome, and advertising budgets have come under pressure accordingly. 2013
looks to be a continuation of this trend as Publicis indicated a more severe 6.5%
organic revenue contraction in Europe in Q1 13.
While Europe has been an easy target, we believe forecasters and the agencies
were also caught off guard by how long companies maintained their own
austerity programmes in regard to advertising. The pace of the advertising spend
recovery began to level off much sooner than in prior recoveries. In 2012, total
ad dollars in the US remained 8% below the 2007 peak. Companies have focused
more diligently on bottom line results and emphasised promotions more heavily
in lieu of advertising relative to other cycles. There has also been a greater
emphasis on return on investment (ROI) of advertising spend, shifting budgets to
more effective digital campaigns and stretching the ad dollars further. While the
difference has not been as severe as in Europe, it has required an adjustment for
the ad agencies.
Nearing an inflection point
However, we believe we may be nearing an inflection point in the global
forecasts. In our opinion, the agencies and forecasters alike have factored in a
more conservative outlook for 2013 that allows room for upside revisions.
We believe the combination of what we
consider subdued advertising expectations
and improving economic sentiment in the
US marks a potential inflection point in
ad spend
In 2013 to date, the biggest disappointment remains Europe. While we believe
there is scope for further disappointment in this region, the figures for North
America remain far more resilient and even appear to be gaining some
momentum. A big factor is a healthier and we believe sustainable economic
recovery, with consumer sentiment on the rise amidst a very accommodative
fiscal policy by the Fed, in our view. We are also entering a period in the
economic recovery where companies’ emphasis begins to shift more toward
revenue growth and less on margin expansion. This shift lends itself to expansion
in advertising budgets as companies accelerate new product introductions and
are more aggressive seeking customers. In addition, the structural changes taking
place in the advertising industry, with a larger share of ad dollars being spent on
digital channels, favour North America where the practice is more established.
Moreover, for the first time over the last year, the agencies collectively put forth a
much more confident tone. To cite a grossly overused financial term, they seem
“cautiously optimistic”.
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Regional exposure
Greater exposure to a difficult European
market limits our outlook for WPP
relative to Publicis, Omnicom and IPG
Advertising agencies, and in particular global conglomerates offer exposure to
advertising across all regions. However, WPP, and to a lesser extent Publicis,
have a relatively higher share of revenues from Europe, as can be seen in the
chart below. We believe that European exposure is a key risk in the short-term,
which is reflected in our relatively more cautious view on the shares of WPP vs
Publicis, Omnicom and Interpublic.
Revenues Exposure by Geography (2012)
Source: Company reports, S&P Capital IQ equity research; April 22, 2013
S&P Capital IQ regional outlook
A healthy US market combined with
Typically, the advertising agencies aim to grow at a rate slightly above global
faster growing emerging markets drive
GDP. However, regions can experience wide divergence in growth rates that can
our global growth forecasts
influence both the agencies near-term growth rates as well as the aggregate
global advertising levels. Today, the widening spread of the growth rates of the
United States and Europe is a good example. This year, we expect the US
economy to return to a steady growth mode with its core advertising growth rate
(excluding the special effect of the Olympics and Presidential Elections in 2012) at
about 3% to 4%. By contrast, we expect the outlook for European advertising to
continue to worsen from already depressed levels. We see no prospect of a
recovery before 2014.
As it stands today, we are anticipating 2013 growth rates in the major regions as
follows.

North America (+3 to 4% core growth)

Western Europe and the UK (Flat to down 2%, with risks on the downside)

Rest of World (+8 to 10%, driven largely by the four BRIC countries – Brazil,
Russia, India, and China).
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Regional exposure influences our opinions on the global
agencies
While we appreciate the favourable long-term prospects of the global agencies,
we believe the near-term risks to the European economies warrant more caution
on those conglomerates relatively more exposed to Europe. On this basis, we
have a Hold recommendation on WPP, but Buy recommendations on Publicis,
Interpublic, and Omnicom. We believe IPG’s and OMC’s geographic profile, with
heavier concentration in the improving US market, positions these companies to
better absorb further European pressures, while Publicis also benefits from its
inroads into higher-growth digital advertising.
WPP (29% of 2012 revenues outside of US and Europe): Currently, WPP has the
greatest relative and absolute exposure to the emerging markets, with almost a
third of its revenues outside of the non-traditional regions. WPP’s management
also likes to emphasise its much higher absolute level of exposure to the higher
growth markets relative to its peers, which we have illustrated in the chart below.
WPP has been active in building its presence in these markets and is wellpositioned to benefit from growth in these regions. However, WPP also has the
largest relative exposure to weak western Europe.
PUB (24% of 2012 revenues outside of US and Europe): Publicis has been just
as active in building its exposure to the developing markets, with roughly 24% of
its revenues originating from outside of the United States and Western Europe.
The company aims to raise the amount of revenues from faster growing markets
to 35% of the group total by 2018, as stated on the April 2013 Capital Markets Day
in London. Growth in these markets, alongside the group’s expansion in digital
businesses has allowed PUB to generate growth slightly above peers over the
past 18 months. In the latest set of results for Q1 13, group organic growth was
only 1.3%, but countries, Greater China and India, delivered y-o-y growth rates
above 10%, while Russian growth was in the 5-10% category organically. This
compares to most of Western Europe on negative ground.
OMC (23% of 2012 revenues outside of US and Europe): OMC is employing a
slightly different approach to building its emerging market exposure. It favours
organic growth vs large bolt-on acquisitions. The group does engage only in
small
purchases,
which
allow
it
to
enhance
only
specific
capabilities.
Management argues that this approach allows the group to integrate smaller
acquisitions into its platform more seamlessly and cost effectively, supporting a
more cohesive offering, even if that means sacrificing some growth relative to its
European peers.
IPG (25% of 2012 revenues outside of US and Europe): IPG’s exposure to the
non-Western markets is also relatively high, which is a product of its early focus
on Asia and strong presence in Brazil. Although the company’s revenues are
lower on an absolute basis, we believe it has more than adequate coverage to
each of the major markets to successfully serve multi-national companies.
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Revenues in Faster Growing Markets - Top 4 Global Ad Agencies (2004-2012)
Source: Company data, S&P Equity Research estimates. April 22, 2013
WPP reports in USD; peer USD revenues as shown in annual results presentations, but translated at average exchange rate
for the year (IPG, Publicis and Omnicom); OMC assumes “non-euro currency” Europe, i.e. Switzerland, Turkey, Norway,
Denmark, Sweden and Eastern Europe are 3% of revenue and Canada 1.5%
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Structural changes
Agency growth outlook driven by
emerging markets
One of the greatest long-term investment strengths of global advertising agencies
is the growing exposure to developing markets where growth rates are poised to
remain higher than the developed world. While the developed markets remain
extremely important in terms of size and developing technology and creativity,
they do not provide the same growth potential as the developing markets where
the consumption per capita is still expanding and discretionary
outlays
increasingly drive a greater proportion of the GDP mix. The global advertising
agencies provide exposure to the growth theme in the consumer sector in
emerging markets. We anticipate growth from these markets will support above
average revenue growth for the large global advertising agencies over the
foreseeable future.
Market growth much higher in developing markets
Advertising expenditure in China, Brazil
A look at the top 10 advertising markets by country illustrates the growing
and Russia is projected to grow more
importance of the emerging markets. While the United States is clearly the market
than three times as fast as in developed
leader, China and Brazil are already among the top 6 advertisers, with Russia
countries over the next three years
projected to join them in the top 10 by 2015 (ZenithOptimedia). Even more
pronounced is the projected growth rate of these three major emerging markets
compared to the more traditional developed markets on the list. Over the next
three years, the three BRIC countries are forecast to grow at an average of 10.7%
per annum compared to just a 2.8% rate for the seven developed markets.
Top 10 Advertising Markets and Projected Three Year Growth Rates (USD mln)
Source: ZenithOptimedia, S&P Capital IQ equity research, December 2012; April 22, 2013
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Agencies follow client growth into emerging markets
Multinational expansion into emerging
The global agencies recognised the phenomenon of growing wealth among
markets has historically led global
consumers in emerging markets long ago and began shifting their focus towards
agencies to increase exposure in these
these geographies, accordingly. We believe the desire to build out emerging
countries
market capabilities is a by-product of following their clients. Armed with the
advantage of strong relationships with multinational clients, the agencies saw
first-hand that greater resources were going towards growing sales in the
developing
markets
where
the
growth
profile
was
much
healthier
than
domestically. Increasingly, the agencies saw an opportunity to build their own
presence in these markets to better serve multi-national clients. As the local
market expertise became more established, opportunities to serve local marketers
also developed. Publicis stated that as of Q1 13, two thirds of its clients in Greater
China are multinational companies, with one third being local groups. However,
the group said it is local advertisers that are currently seeing the most dynamism,
highlighting future trends, in our view.
The favoured expansion method into emerging markets has been through
acquisitions, but the agencies have also built local expertise organically in some
cases. Typically, the entry came through a joint venture or acquisition of a local
market operator, which then allowed the parent to layer on some its own
technology and best practices.
The four major global agencies increased
their revenue exposure to non-Western
markets by six to nine percentage points
since 2006, led by WPP
WPP has been the most aggressive in terms of its ramp up of capabilities beyond
traditional developed markets, with its exposure up to roughly 30%. However, the
other major global agencies have not lagged too far behind and established
significant presence in faster growing markets as well. IPG is second with roughly
25% of its sales outside of the US and Europe, while Publicis has 24% and OMC
24%. In effect, we think all four major holding companies have more than
sufficient international coverage to serve a global client across all of the major
geographies, and they are also starting to cater to a growing number of local
clients in these markets.
Percentage of Revenue Outside of North America and Europe
Source: Company reports (2006-2012); April 22, 2013
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Agencies provide attractive exposure to consumers in higher
growth markets
In our opinion, the global agencies are in a prime position to benefit from the
positive macro factors that will drive consumer wealth in the emerging markets.
The large global agencies have already developed a solid foundation in the key
higher growth markets like Brazil, Russia, India and China, so the heavy lifting on
the investment ramp is largely behind them, in our view. We believe they are in a
good position to leverage that base to drive above-average growth and returns
going forward. The ability to serve multinational clients in a coordinated effort
has been significantly upgraded and enhanced, which should foster improved
collaboration and partnerships as the multinationals continue to expand further in
the markets.
Accounts concentration positive for global ad groups
We see this factor also influencing further consolidation of accounts in favour of
global holding ad agencies, over locals and independents. The benefit of
coordinating a consistent message across multiple markets while catering to
specific customers in a region is gaining resonance with greater frequency. While
we recognise that every account is different and some will prefer local market
independent agencies, we see this trend of global account consolidation
continuing.
Sizing the market opportunity outside of the developed
countries
While it is obvious that developing markets have the potential for greater growth
as they catch up with developed markets in terms of wealth, in this section we
size the magnitude of the opportunity.
We see potential for the major emerging
markets to add USD200 billion to total
global advertising spend over the next 15
years
We see potential for the top nine major emerging market countries to add at least
USD200
billion
to
global
advertising
spend
over
the
next
10-15
years.
Collectively, these nine markets generated roughly USD91 billion in advertising
revenue in 2012. Our baseline assumption that these markets will approach onethird the level of advertising dollars spent per person in the more developed
Western markets, implies a tripling of the market over the next 15 years.









China,
Brazil,
Russia,
India,
Indonesia,
Turkey,
Poland,
Mexico, and
South Africa.
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April 25, 2013
(We appreciate that other countries outside of these nine present attractive
opportunities and are likely to garner increased attention as these markets begin
to mature, but we are limiting the scope for purposes of this exercise.)
As a base of reference, ZenithOptimedia sizes the 2012 total global advertising
market at approximately USD498 billion. What we would classify as developed
markets - the US, Western Europe, UK, Japan, Australia, Canada, and Korea comprise roughly 71% of that total or USD352 billion.
Potential Size of Major Emerging Markets Compared to Current Developed Markets
Assuming Annual Advertising Spend per Person of USD126 – one third that in Developed Markets (In Billions of USD)
Source: Ad Age (June 2012), ZenithOptimedia (December 2012), CIA World Factbook (April 2013),
S&P Capital IQ equity research estimates; April 22, 2013
Using advertising dollars spent per person as a proxy
China would surpass the US as the largest
There are several ways to measure the spending gap between countries, with
advertising market if annual advertising
advertising dollars to GDP being one such common approach. We are choosing
spend per person reached just one third
to focus on advertising dollars per person, which we believe is an equivalent way
the level in the developed world
to interpret the market situation. Namely that developed countries spend a much
greater proportion of their money on measurable forms of advertising, but that
gap is narrowing as the emerging market consumer accumulates more disposable
income. Intuitively, this makes sense. Historically, wealth in the emerging
markets is often more concentrated with a less developed middle class less
devoted to discretionary purchases. Spending money to advertise commoditized
staples produces little marginal return and advertising is more limited as a result.
However, as wealth accumulates and the economies start to develop a more
robust middle to upper class, purchasing power begins to shift towards more
discretionary goods. Brand building and product differentiation begin to make
more sense in this environment, driving advertising spend to help influence those
purchase decisions.
This phenomenon has been occurring in the BRIC countries already. (BRIC is an
acronym referring to Brazil, Russia, India, and China, representing the leading
countries in the developing market expansion.) A market like Brazil or China can
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hardly be classified as “emerging” in the traditional sense of the word at this
stage. Both countries already operate with a sophisticated advertising and
consumer markets. Nevertheless, the rate of participation in the consumer
economy remains well below the levels seen in the traditional developed
countries. We see material growth ahead, even in these later stage emerging
markets, as the economies continue to shift toward consumer driven growth.
Developed countries versus emerging markets in terms of ad
spend per person
Average annual advertising spend per
The average ad spend per person p.a. in the major Western and developed
person in the developed countries stands
markets was c.USD400 in 2012. By comparison, Brazil spends an average of
at between four times (Brazil) and eight
c.USD92 per person p.a., with Russia at USD68 and China at USD27. These three
times (China) the level in the major
countries are generally considered the major focus markets for the global
emerging markets
agencies and represent a significant source of growth in both the near and long
term. In the five other markets we deem of particular significance, the annual ad
spend per person ranges from USD26 (Indonesia) to USD85 (South Africa), with
Mexico, Poland and Turkey coming somewhere in between. India is a unique
market, which due to its cultural and socio-economic make-up, is unlikely to
mirror the development of the other BRICs and should be considered in isolation,
in our view. India’s annual ad spend is only USD5 and remains well below the
other markets. However, given its sheer size and well-educated, burgeoning
middle class, we think it represents an interesting long-term opportunity.
Comparison of Ad spend per Person in Major Developed and Emerging Countries
Source: Ad Age (June 2012), ZenithOptimedia (December 2012), CIA World Factbook (April 2013),
S&P Capital IQ equity research estimates; April 22, 2013
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Propensity for advertising shows a wide variance
While the average annual spend is USD400 per person in the Western and
developed markets, the amount does vary widely across countries.

The highest is Switzerland with USD737.

The US is relatively high at USD512.

Japan is at the developed average of USD400.

The UK, Germany, and Canada are around USD300.

Lower on the developed scale are France and South Korea – at USD200 each.
Baseline premise: the emerging markets will achieve onethird the Western spend
Emerging markets’ advertising per person
We start with the premise that over time, as a more robust middle class develops
should expand as wealth accumulates and
in the emerging countries and the discretionary market grows, advertising spend
purchases shift to more discretionary
per person will climb towards levels seen in mature markets. As a baseline, we
items from commoditised staples
set a target that the emerging markets will reach one-third the average of
developed countries of USD400 annual spend per person over the next 10-15
years. This works out to a baseline target of roughly USD126 per person per year.
For some countries, this level seems almost a certainty (Brazil, Russia, South
Africa) and they are likely to surpass the target much earlier than 10 years. For
others, limiting factors like population dispersion or societal makeup might make
this target seem a high hurdle to achieve within this time frame. Recognising
these realities, we apply the baseline assumption across our eight focus markets
(excluding India, which we handle separately) and test the results against
industry forecasts.
Brazil, Russia, and China – the current focus markets
Among the major emerging markets, Brazil and Russia are already moving rapidly
towards the low end of the spending share in mature markets. They are currently
growing at double digit rates and have the ability to catch up relatively quickly, in
our view.

Brazil is among the top markets at USD92 – but still growing double digits.

Russia is USD68, with room to expand.

China is relatively low at USD27. While we anticipate continued fast growth
state regulations, control of media, income inequality are all limiting factors.
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April 25, 2013
Collectively, these three countries have total advertising expenditures of roughly
USD65 billion. ZenithOptimedia projects these three countries to account for 29%
of the entire worlds advertising growth over the next three years. This is where
the lion share of the focus lies for the major global agencies, as a result.
By many accounts, the maturity of the
advertising market in Brazil is already
near that of the developed markets, but
we believe there is still room for further
growth
Based on current rates of growth, it would take Brazil just four years to reach our
baseline target of USD126 per person of annual advertising spend. With Brazil set
to host both the World Cup for football (soccer) in 2014 and the Summer Olympic
Games in 2016, the country is poised to assume prominence on the World Stage
and be a focal point for many marketers accordingly. Brazil also serves as a
launch pad into other Latin American countries as well. Conceivably, Brazil is
likely to extend its advertising propensity rate well beyond our target levels.
Russia would achieve the USD126 ad spend target in just seven years at current
rates. Its strong ties to Europe combined with rich resource-based exports have
accelerated its exposure to western style marketing, with advertising picking up
steam. Russia is poised to enter the list of top ten advertising markets by 2015.
Ironically, those same factors that have driven accelerated rates of growth in
recent years are threatening the near-term economic prospects, with European
macro weakness and falling commodity prices threatening to stall Russia’s
economic growth. While this may depress near-term advertising levels, the longterm factors supporting elevated advertising growth remain intact.
China presents the biggest overall
opportunity given its size, wealth, and
directed shift towards a consumer driven
economy
China is starting from a very low base, but growing rapidly. The sheer size of the
country as well as its wealth accumulation in recent years makes it a prime target
for advertising, particularly in luxury goods. China has already ascended to the
number three advertising country, with expectations that it will soon surpass
Japan to move in to the second spot.
Despite the large total, the advertising
dollars per person spend remains relatively modest at just USD27, well below
western developed markets as well as Brazil and Russia. The country would have
to sustain its current 10-12% growth rate for the next 16 years to get to our
baseline target. A shift towards a consumer driven economy by a new political
regime supports the prospects of sustained double digit growth, we believe. To
date, much of the global agency participation in the market has come from
multinational clients attempting to market their products to the Chinese
consumers.
Although China faces greater political
risks and operating restrictions, in our
opinion
While China remains a compelling market opportunity, we also acknowledge that
operating in the country presents some additional challenges for the global
agencies. Government oversight on media, ownership restrictions, and navigating
local business practices that might not adhere to western standards are three
such challenges. While advertising agencies have not faced incidences on this
front, recent enforcement of the Foreign Corruption Practices Act has ensnared
some U.S. publicly traded companies in recent years, drawing focus on the issue.
In spite of these challenges, the market is too important to ignore and the global
agencies generally appear to be navigating these obstacles to establish
themselves in the market.
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The next frontier regions – other critical advertising markets
The agencies have established positions in
Although the lion’s share of the advertising focus in emerging markets tends to
the next frontier markets beyond the
go to the BRIC countries, marketers are increasingly pushing into other markets
much talked about big three of China,
for growth. We highlight several next level markets that we believe represent
Brazil, and Russia
decent growth opportunities and present an emerging focus of marketers and
agencies alike: Indonesia, Turkey, South Africa, Mexico, and Poland. We note that
there are several similarly situated countries in the regions that likely present
compelling growth opportunities as well. Other important growth markets likely
include Argentina and Columbia in Latin America and Vietnam in Southeast Asia.
We estimate that these five countries will add roughly USD50 billion in total
advertising spend over the next 10-15 years.

Indonesia – the fourth largest total contributor to global growth spend,
projected to add USD4.5 bln to 2015. Indonesia’s ad spend rate is
comparable to China at USD26 per person.

Turkey – the bridge between Europe and the Middle East. Small now, but
growing rapidly. Also small spend per person at USD34, but Western ties can
be leveraged and it could provide a springboard into MENA.

South Africa – the most developed in Africa with spend at USD86 per person
currently. Also critical to have established presence in the region as a
gateway into broader Africa.

Mexico – and most of Latin America, including Colombia and Argentina.
Mexico is a proxy for these markets, but with close ties to the US, a more
immediate opportunity. Mexico is still relatively far below peers on ad spend
at USD46 per person. Some catch-up is likely. Its drug related violence may
be impeding some marketers from embracing the market.

Poland is another interesting country that has growth potential, but currently
appears in limbo due to its inclusion in the Eurozone and uncertainty around
the broader EU. It currently stands at just USD60 per person ad spend,
significantly below Eurozone peers, and has the potential to catch up in
terms of ad spend once the problems of the EU are addressed.
India – the tiger opportunity
India presents a unique market full of
India almost has to be considered in isolation given the untapped opportunity
promise, although the trajectory is not as
coupled with many significant hurdles that have to date impeded the growth of
clear as some of the other major emerging
advertising. The second most populous country has a large, highly educated
countries
population and a rapidly growing middle class. These factors alone should
suggest a burgeoning advertising sector. However, the advertising rate, on both
an absolute and per person level remains well below its peers. There are several
factors that likely account for this low level: restrictions on national and foreign
owned retail (usually a high advertising sector), socio-economic issues and high
levels of poverty, poor overall infrastructure that limits the capital investment
required to establish a strong manufacturing base, and a traditionally socialist
government.
Despite these issues, India holds significant promise and the major agencies are
establishing their positioning in the market as a result. Given its large well-
S&P Capital IQ
Equity Research
15
April 25, 2013
education population and a government that is increasingly showing willingness
to open up the economy, we believe it is only a matter of time before advertising
begins to flourish. Discussions about opening up retail to foreign operators, for
example, would invite more multinationals into the market and drive greater
advertising levels.
Even if the advertising market advances towards its peers, given the high degree
of poverty, we believe a much lower target for advertising spend per person is
appropriate. In this context, we have applied a 75% reduction to the average ad
spend of USD126 which results in USD33. This target rate for India is just above
where Indonesia and China are currently operating, and in line with Turkey. At
this level, we assume that India can get to an almost USD40 billion market in the
next 15 years, from just USD6 billion today. We note, to achieve this target India
will have to grow at roughly 13% per year for the next 15 years.
Putting the growth projections into perspective
As a reality check on our assumptions, we compare the projected advertising
growth contribution for the major markets, using ZenithOptimedia’s projections.
Five of the countries among the top ten dollar contributors to growth are in our
target emerging market group that we deem of significant importance, with a
sixth emerging market (Argentina) also expected to make it to the top ten.
Four of the top five contributors to global
growth over the next three years are
projected to be emerging markets
Not surprisingly, four of the top five contributors to total growth are based on
ZenithOptimedia’s projections and are also on our focus list, with Indonesia
joining China, Brazil, and Russia. The China 15-year target market size, based on
ZenithOptimedia’s
three
year
total
contribution
projection,
would
require
acceleration in total ad spending. If the country continues an aggressive shift
towards a consumer led economy, such as acceleration may be a possibility.
More likely, the curve would flatten and provide a longer tail-wind of growth.
Conversely, Brazil, Russia, and South Africa are on track to achieve the target
levels much sooner and our baseline appears to have undershot for those
markets.
Top 10 Dollar Growth Contributors to Global Advertising Spend
Against 15-Year Target
Source: ZenithOptimedia, December 2012, S&P Capital IQ equity research; April 22, 2013
S&P Capital IQ
Equity Research
16
April 25, 2013
17
US and Europe remain critical markets
Despite US being a more mature market,
Although the rate of growth in the developed markets is likely to be more muted
its total contribution to global growth
than the higher growth emerging markets, they remain critical advertising
over the next three years is projected to
markets and still contribute to the overall growth. The US is poised to contribute
equal China, Brazil and Russia combined
as much to the total global advertising growth as China, Brazil, and Russia
combined over the next three years. In this case, the difference is largely due to
the relative size of the United States on top of a decent 4 to 5% growth projection.
Likewise, three other relatively mature markets are expected to be in the top ten
contributors to global growth. Japan, South Korea, and Germany are all expected
to add at least USD1.9 billion to the USD2.5 billion over the next five years.
(Western Europe as a whole is projected to add USD4.7 billion). In addition to the
potential sales growth contribution from the developed markets, companies
moving into emerging markets rely on the top four global agencies to support
them. The developed markets also breed innovation that can be applied globally.
The expansion and application of digital advertising techniques tend to be
developed in the US and refined for international dissemination, for example.
So while it is tempting to focus just on emerging markets, the more mature
developed markets remain significant to both top and bottom line results.
Digital advertising
The other big structural growth driver of the advertising industry is exposure to
digital advertising, which is a broad area encompassing anything from digital
marketing, data and insight services, to internet advertising. In terms of the
absolute ad dollars spent, internet advertising is by far the largest area of digital
advertising, including Display, Classified and Paid Search.
Global ad agencies benefit from digital advertising in three ways:

Being exposed to the fastest growing area of advertising;

Being exposed to client budgets beyond advertising & promotion, in
particular, technology or even retail channels;

EBITA margin enhancement due to exposure to complex consulting-driven,
fee-based higher value services.
S&P Capital IQ
Equity Research
April 25, 2013
18
Internet: The Fastest Growing Area in Advertising
According to ZenithOptimedia’s December 2012 figures, Internet advertising
Internet advertising continues to take
contributed 18.0% of total World advertising expenditure in 2012, still lagging
share vs traditional advertising media
behind Newspapers at 18.9%, despite the extended decline the print sector has
seen over the past ten years. There are marked differences between countries,
but the trend is clear: newspaper and magazine advertising were 30% of total
global advertising in 2011, but are likely to be just 23% by 2015E according to
ZenithOptimedia. In the same period, Internet advertising is likely to go from 16%
to 23%.
Global Ad Spend by Medium
100%
16.1%
18.0%
19.8%
21.6%
23.4%
6.9%
6.4% 0.6%
6.7%
6.3%
40.1%
40.1%
40.0%
90%
80%
70%
6.7%
7.1%
39.9%
60%
0.5%
6.6%
0.6%
7.0%
40.2%
6.5%
0.5%
0.6%
6.6%
50%
40%
30%
9.4%
8.8%
8.3%
7.8%
20.3%
7.3%
18.9%
17.8%
16.8%
15.9%
2012
2013
2014
2015
20%
10%
0%
2011
Newspapers
Magazines
Television
Radio
Cinema
Outdoor
Internet
Source: ZenithOptimedia, December 2012; April 22, 2013
Agencies have been quick to react to these changes by offering an increasing
amount of digital advertising services, and reducing exposure to print media.
While in the world of print media, margins depended heavily on the ability of an
agency to secure good pricing in broadsheets, in the world of digital advertising
agencies must offer insight, data, and value added services in order to show the
effectiveness of a campaign.
Publicis has been very acquisitive in Digital Media and it now generates 36.9% of
its revenues (end-Q1 13) from digital sources, which, delivered organic growth of
8.5%. The group’s growth has been mainly via acquisitions. In 2007, Publicis
bought digital agency Digitas, followed by Razorfish from Microsoft in 2009. Last
year, Publicis again made a sizeable acquisition in the digital space, acquiring one
of the last remaining digital agencies with global scale in the industry, LBi.
S&P Capital IQ
Equity Research
April 25, 2013
19
Search and beyond
The bulk of internet advertising expenditure (almost half) is spend on paid search,
where the key market players are Google, Yahoo, and MSN’s Bing, to name the
largest. However, it is within Display advertising that internet advertising will see
the biggest increase in expenditure over the next few years, according to
ZenithOptimedia.
Growth in Display Advertising tops Paid Search
25%
20%
15%
Display
Classified
10%
Paid search
5%
0%
2012
2013
2014
2015
Source: ZenithOptimedia, December 2012; April 22, 2013
Display advertising on the internet is
likely to see higher growth than search
over the next few years
According to ZenithOptimedia, expenditure on internet display advertising will
have doubled by 2015 vs 2011 to a level of USD57 bln, trailing just behind paid
search at around USD61 bln. There is an ongoing debate in the industry,
questioning the role of the agency in a world where search is the main form of
advertising, with some talking about disintermediation, or eliminating the role of
the agency.
Those fears have proven unfounded over the last two years, with big players like
Google still very much in favour of the role of the agency in helping the client
make key strategic decisions. Agencies are also quick to point out that clients
don’t go to a particular car company to ask which car to buy, but rather use
independent reviews, and independent dealerships.
It is also the nature of product marketing that requires a holistic approach to
advertising campaigns where search can, and usually is, one aspect of a
campaign, but not the whole campaign. In particular, TV viewership has stabilised
among most developed economies and it continues to play an important role in
the advertising mix. Sticking with our car example, in order for a potential car
buyer to search for a particular car model, he/she needs to be aware that a new
model actually exists, and for that to happen, TV and any form of display
advertising, on and offline, continue to play key roles in the advertising mix.
S&P Capital IQ
Equity Research
April 25, 2013
If anything, we argue that the sheer complexity of media viewership means that
the role of the agency is required more than ever before. An advertising
campaign may begin on TV, and may be followed on direct marketing, display,
dedicated websites, street advertising, and search. In the meantime, data is being
harvested, analysed and used to change the mix through the product cycle. In this
environment the role of the agency remains extremely important.
Agency role still vital
What this also means, however, is that demands on the agency in terms of data
and analysis are increasing along with the sophistication of advertisers that
demand an ever increasing number of measureable results. It also means that it is
becoming more expensive for agencies to deliver real value for clients, which
now demand proprietary data and insight that can help them reach out to a
specific audience at a lower price.
Beyond A&P
Another important element of the expansion in digital advertising is the
expansion of the addressable market for the big global advertising agencies.
Traditionally almost all revenues are derived from clients’ Advertising &
Promotion (A&P) budgets, broadly under key chief marketing officers (CMOs). In
turn, these budgets are related to sales budgets and are heavily cyclical in nature.
During cyclical economic upturns, companies usually launch new products, and
CMOs are encouraged to increase the level of advertising to make consumers
aware of product innovations.
During economic downturns, product launches are typically withheld and
advertising activity is reduced in favour of promotional activity to keep sales from
falling. During the downturn of 2008 and 2009 advertising budgets were severely
cut, leading to negative advertising figures across most of the developed world.
Digital advertising, however, is allowing ad agencies to tap another source of
income beyond A&P budgets: technology. When ad agencies offer clients to
monitor, analyse, harvest and leverage client data, the purchasing decision does
not necessarily come from CMOs, but rather CIOs, or CTOs. The same is true
when agencies offer to construct special dedicated websites, or data warehouses
to monitor customer behaviour, which, in turn, can be used to alter product
design decisions, or product placement decision, again activities that go beyond
A&P.
So far, advertising agencies do not break down the amount of revenues coming
from these sources, and it is still marginal, in our view. However, we see potential
for growth outside the traditional advertising markets. The only caveat here is
that competition in this space is also fierce, with data companies or consulting
companies also vying for a share of CTO’s and CIO’s budgets.
S&P Capital IQ
Equity Research
20
April 25, 2013
21
Margin Expansion
Digital growth also means that agencies have to spend more on technology and
talent, which could potentially squeeze margins. Managements of most global ad
agencies, however, tend to emphasise that cost increases are more than offset by
upside from more value added services involved in digital advertising. In general,
the business model of the agencies is increasingly changing from experts on the
pricing of media inventory to co-authoring of content, data mining and other
complex consulting solutions that derive high value fees.
In this context, we believe expansion into digital advertising has the potential to
increase EBITA margins across the sector, which we have incorporated into our
figures for the next 24 months, as follows.
EBITA margin evolution (% of sales, 2012-2014E)
Company
WPP
PUB
OMC
IPC
2012
14.8
16.1
13.4
10.4
2013E
15.3
16.3
13.7
10.6
2014E
15.7
16.6
13.9
11.5
Source: Company data, S&P Equity Research estimates; April 22, 2013
S&P Capital IQ
Equity Research
April 25, 2013
22
Company portraits
Summary of recommendations
Our recommendations reflect our view of a cautiously optimistic outlook for
global advertising agencies, driven by structural trends highlighted in this report,
namely growth in digital advertising and further expansion in higher growth
markets. Our recommendations also reflect a more positive view on companies
with less relative exposure to Europe and a higher exposure to North America,
which remains the world’s largest advertising market.
Summary of Recommendations
W Europe
(% 2012
Revenues)
16.4%
20.1%
Interpublic
IPG US
13.5
USD
Buy
16.0
Dividend
Yield (%) FE 2013
14.7
2.2%
Omnicom
OMC US
58.0
USD
Buy
65.0
14.5
2.8%
3.7%
PUB FP
50.8
EUR
Buy
60.0
14.0
1.5%
10.0%
28.5%
WPP LN
10.5
GBP
Hold
11.5
12.7
2.0%
9.1%
36.8%
Name
Bloomberg
Ticker
Publicis
WPP
Price
Cur
Rec
Target
Price
P/E
2013E
EPS 4-YR
CAGR
25.1%
Source: S&P Capital IQ equity research estimates, April 22, 2013
Our forecasts vs consensus
Our revenues and EPS figures reflect our view on the sector, with most of our
numbers for 2013E and 2014E being higher than Capital IQ consensus figures, as
follows.
EPS: Our Numbers vs Consensus
2013E
2013E
Consensus Our Forecast
2014E
Consensus
2014E
Our Forecast
WPP (GBP)
0.80
0.83
0.88
0.90
Publicis (EUR)
3.58
3.64
3.85
3.88
Omnicom (USD)
3.94
3.99
4.38
4.46
Interpublic (USD)
0.85
0.92
1.07
1.14
Source: Company data, S&P Equity Research estimates, Consensus based on Capital IQ; April 22, 2013
S&P Capital IQ
Equity Research
April 25, 2013
23
Revenues: Our Numbers vs Consensus (mln)
2013E
2013E
Consensus Our Forecast
WPP (GBP)
Publicis (EUR)
Omnicom (USD)
Interpublic (USD)
2014E
Consensus
2014E
Our Forecast
11,025
11,247
11,554
11,670
7,077
6,962
7,463
7,253
14,708
14,743
15,397
15,567
7,142
7,189
7,423
7,531
Source: Company data, S&P Equity Research estimates, Consensus based on Capital IQ; April 22, 2013
Publicis
Our recommendation is Buy. Publicis continues to benefit from its growing
exposure to digital advertising and fast growing markets, which combined
contribute c. 55% of revenues and are set to deliver 75% by 2018, in our view (in
line with April 2013 guidance). Short term, we do see some cyclical economic
challenges due to stagnant European economies and lack of global advertisingboosting events, but, as the year progresses, we believe focus will shift to 2014, a
year likely to be significantly stronger due to the Winter Olympics, Football World
Cup, and the US mid-term elections. We believe the LBi integration and the
group's growing digital revenue exposure give it control on margins, which are
already higher than key global peers, while also giving it a higher growth profile
than traditional advertisers less exposed to digital markets.
Our 12-month target price of EUR60 is based on a DCF intrinsic value calculation,
where we assume a WACC of 9.4% and a terminal growth rate of 3.0%, given the
group's global exposure.
Publicis has been benefiting from its strategic push into emerging markets and
digital advertising, which combined contribute more than 55% of group revenues
and are experiencing a significantly higher rate of growth than traditional
advertising. This is allowing the group to weather very weak macroeconomic
conditions in Europe (28% of the group's revenue base in 2013, on our estimate).
We forecast 3.5% organic growth in 2013 vs. 2.9% achieved in 2012, in line with
April 2013 guidance. We expect higher growth markets and North America to
continue to offset European weakness.
We expect Publicis' EBITA margin to increase to 16.3% this year vs. 16.1% in
2012, which was up 10bps y-o-y. The group has a good track record of integrating
acquisitions, with LBi synergies kicking in this year, in our view. Meanwhile,
management has some operational control on costs due to the use of freelancers
for more cyclical activities. This reduces margin cyclicality, in our view. Mid-term,
we believe margin support will come from an increased share of revenues in
higher-margin digital services. These currently account for 33% of total revenues,
with management aiming for 50% by 2018.
S&P Capital IQ
Equity Research
April 25, 2013
We forecast core fully diluted EPS of EUR3.65 in 2013 and an increase to EUR3.88
in 2014. We note that forecasts are sensitive to FX rates, given most revenues are
USD related. The company declared a EUR0.90 dividend for 2012 (29% payout)
and aims for a mid-term target of 35% payout, still keeping balance sheet
flexibility for acquisitions.
Downside risks to our target price and recommendation include a protracted
recession in Europe or a significant slowdown in higher growth markets. The
shares could also suffer from value-destroying acquisitions in particular, with
asset price inflation in higher growth markets posing a threat. Also, in October
2012, management confirmed it had considered a merger with Interpublic in the
past, a deal that given its size could pose significant financial risk.
WPP
Our recommendation is Hold. We believe WPP has proven itself very able to
weather European economic headwinds, thanks to exposure to higher growth
markets and digital advertising. We believe this should help in 2013, a year that
lacks large ad-boosting events. That said, as the year progresses, we believe
focus will shift to 2014, which is likely to be significantly stronger due to the
Winter Olympics, Football World Cup, and the US mid-term elections. Meanwhile,
we like WPP's long-term strategic drive to derive a higher share of revenues and
profits from Faster Growing markets and Digital (54% in 2012), which is likely to
aid both the top-line growth profile and margins, in our view.
Our 12-month target price is GBp1,150, based on a DCF valuation for which we
assume a WACC of 9.2% and terminal growth rate of 3.0%.
We think WPP is very well placed to weather the cyclical economic pressures the
advertising sector is facing this year, thanks to its increasing exposure to highergrowth markets in Asia and Latin America and expected growth in digital
advertising solutions, both in advertising and investment management, but also
consumer insight. We believe Asian markets will compensate for weakness in
Europe, while growth in Digital is also likely to offset a lack of big global adboosting events this year compared to 2012, which included the US presidential
elections and the London Olympics. We forecast 3.2% organic revenue growth in
2013 and an increase to 3.8% in 2014 thanks to the Sochi Winter Olympics, FIFA
World Cup, and the US mid-term elections.
We expect widening margins in 2013 and 2014 due to growth in Digital revenues
and tight cost control. Management has been able to match its revenue evolution
with headcount (70% of operating costs) through the cycle and is guiding for
50bps annual operating margin gains per year. Given the evolution achieved in
2012, we believe such gains are achievable over the following year and next,
leading to 15.3% and 15.8% adjusted EBITA margins for 2013E and 2014E,
respectively.
S&P Capital IQ
Equity Research
24
April 25, 2013
The company targets to deliver EPS growth of 10% annually, with acquisitions
likely to play a major role, in our view. We forecast fully diluted adjusted EPS of
GBp83, GBp90, and GBp96 for 2013-15 respectively. WPP aims for a dividend
payout of 40%.
Downside risks to our target price and recommendation include a significant
economic contraction in G7 economies that would reduce global advertising
expenditure over the next 12 months. We think further risks are value-destroying
acquisitions, particularly overpaying for assets in higher growth markets. Risks
also include management significantly reducing its goal of a 50bp margin
enhancement per year.
IPG
Our recommendation is Buy. The combination of disciplined expense control,
enhanced capital structure, prospects of improved account retention, and a
favourable industry backdrop make IPG shares attractive, in our opinion.
Management has had a good track record in delivering earnings growth, with
2012 results representing the first major internal setback since the current
management team took control in 2005. We see margin and sales growth
resuming in 2013, with the pace of improvement poised to accelerate throughout
the year and ramping into 2014. Emerging market offerings, digital capabilities,
and an integrated media platform represent potential key growth drivers. In our
opinion, IPG should benefit from the same global emerging consumer theme as
its peers, with the advantage of company specific margin drivers.
Our 12-month target price of USD16 is based on 14X P/E on our 2014 EPS
estimate of USD1.14. Our target multiple is below IPG's peers due to less
consistent operating performance, but falls well within its historical range.
Operating margin was essentially zero in 2005 when new management came in
and began a multi-year turnaround effort. From that point on, the company
exhibited steady operational gains, improving operating margins to 9.8% in 2011.
The turnaround effort stalled in 2012 as the company digested some major
account losses and revenue fell below plan. Nevertheless, it maintained a flat
EBIT margin while continuing to make long-term investments. The company
appears to us on a much stronger footing heading into 2013 and we see renewed
account wins and revenue growth driving operating margins back on an upward
trajectory. Management has set a goal to achieve operating margins of at least
13% by 2016, which we believe is reasonable. The target will bring IPG more in
line with its peers, in our view.
We anticipate IPG will resume its upward trajectory in both organic revenue
growth and margin expansion in 2013, following a consolidation period in 2012
when both metrics stalled. We estimate improved account retention combined
with a favourable industry backdrop will drive 3.2% organic revenue growth,
accelerating from 0.7% in 2012. Q1 13 organic growth of 2.3% was an
encouraging start, with comparisons easing as the year progresses.
S&P Capital IQ
Equity Research
25
April 25, 2013
We estimate EBIT margins to expand modestly to 10.0% in 2013, from 9.8% in
2012, as sales leverage and salaries support operating leverage. While we expect
the costs to attain new business to depress margin improvement in the first half
of 2013, this should enable the group to show accelerated margin improvement in
H2 13 and into 2014. We believe the company is well positioned to see a solid
2014, with potential account wins combining with a favourable event calendar.
Risks to our recommendation and target price include: 1) Sudden major account
losses; 2) Deteriorating macro and advertising environment; 3) Sovereign risk and
macro shocks.
OMC
Our recommendation is Buy. Omnicom continues to post very consistent
performance and we consider the company to be the bellwether in the sector in
which it operates. Our longer-term investment thesis for Omnicom is its exposure
to an emerging global consumer class as it follows its multinational accounts into
the faster growing markets, which should support above-average growth for the
next decade. In the near term, we look for international and US organic sales to
continue to be the main driver of growth, with continental Europe lagging, but
with downside limited .
We employ a combination of P/E and EV/EBITDA to derive our 12-month USD65
target price. We apply a 14.5X P/E to our 2014 EPS estimate of USD4.46, a slightly
below market multiple to reflect a historically economically sensitive end market.
We view this multiple as conservative given the steady cash flow generation and
improved predictability of the operating model, and believe that over-time
investors will appreciate its shareholder return characteristics as well as exposure
to faster growing emerging markets. On an EV/EBITDA basis, our target price is
8.5X our 2014 estimate, which is below its historical average and in line with its
global peers.
The company employs a steady shareholder return policy, directing over 70% of
its operating cash flow to shareholders through dividends and share repurchases.
Moreover, the dividend payout ratio has increased in recent years, giving it a
current yield of 2.7%, the highest among the top four global agencies. We believe
this payout is sustainable.
Omnicom had set a goal of achieving its 2007 peak EBITA (earnings before
interest, taxes, and amortisation) margin of 13.4% by at least 2013, following the
severe advertising shocks of 2008 and 2009. It achieved this target level one year
early, with 2012 EBITA of 13.4% improving 120 basis points from the 2009 low.
Going forward, we anticipate a slower rate of margin expansion as the model
moves into equilibrium and as management emphasis shifts towards revenue
growth and steady shareholder returns. While the company can always find
further operating margin opportunities, expanding materially from here is not an
immediate priority for management. Management has targeted roughly flat
operating margins for full year 2013, which was consistent with Q1 13 results.
S&P Capital IQ
Equity Research
26
April 25, 2013
We are quite comfortable with that margin stance as the company continues to
invest in its capabilities in digital and global markets. We see the potential for
margin expansion to resume if the European market were to improve, as we think
the company has managed margin pressure here, aided by other regions, in order
to maintain adequate service levels during the downturn.
Our longer-term thesis for Omnicom is its exposure to an emerging global
consumer class as it follows its multinational accounts into the faster growing
markets. While US and Europe are critical markets that will drive near-term
operating results, the long-tail of growth stems from the non-Western countries
where improving discretionary spends attracts ever greater advertising dollars.
Omnicom is well-positioned across the key emerging markets. We anticipate the
company will experience above average growth for at least the next decade as it
leverages its solid multinational relationships to cater to a rapidly growing
consumer sector.
The biggest risks to our recommendation and target price are: 1) Sudden major
account losses; 2) Deteriorating macro and advertising environment; 3) Sovereign
risk and macro shocks.
S&P Capital IQ
Equity Research
27
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Chief European Equity Strategist
+44 (0)20 7176 7832
+44 (0)20 7176 7843
Energy
Christine Tiscareno
Oil & Gas
+44 (0)20 7176 7838
S&P Capital IQ
Equity Research
S&P Capital IQ Equity Research – S&P Capital IQ Equity Research U.S. includes
Glossary
Standard & Poor’s Investment Advisory Services LLC; Standard & Poor’s Equity
Research Services Europe includes McGraw-Hill Financial Research Europe Limited
trading as Standard & Poor’s; Standard & Poor’s Equity Research Services Asia
S&P STARS - Since January 1, 1987, Standard & Poor’s Equity Research Services has
includes McGraw-Hill Financial Singapore Pte. Limited’s offices in Singapore,
ranked a universe of U.S. common stocks, ADRs (American Depositary Receipts), and
Standard & Poor’s Investment Advisory Services (HK) Limited in Hong Kong,
ADSs (American Depositary Shares) based on a given equity’s potential for future
Standard & Poor’s Malaysia Sdn Bhd, and Standard & Poor’s Information Services
performance. Similarly, Standard & Poor’s Equity Research Services has used
(Australia) Pty Ltd.
®
STARS methodology to rank Asian and European equities since June 30, 2002.
Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts
Abbreviations Used in S&P Equity Research Reports
rank equities according to their individual forecast of an equity’s future total return
CAGR- Compound Annual Growth Rate
potential versus the expected total return of a relevant benchmark (e.g., a regional
CAPEX- Capital Expenditures
index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index)), based on a 12-
CY- Calendar Year
month time horizon. STARS was designed to meet the needs of investors looking to
DCF- Discounted Cash Flow
put their investment decisions in perspective.
EBIT- Earnings Before Interest and Taxes
®
®
EBITDA- Earnings Before Interest, Taxes, Depreciation and Amortization
S&P Quality Rankings (also known as S&P Earnings & Dividend Rankings)- Growth
EPS- Earnings Per Share
and stability of earnings and dividends are deemed key elements in establishing
EV- Enterprise Value
S&P’s earnings and dividend rankings for common stocks, which are designed to
FCF- Free Cash Flow
capsulize the nature of this record in a single symbol. It should be noted, however,
FFO- Funds From Operations
that the process also takes into consideration certain adjustments and modifications
FY- Fiscal Year
deemed desirable in establishing such rankings. The final score for each stock is
P/E- Price/Earnings
measured against a scoring matrix determined by analysis of the scores of a large
PEG Ratio- P/E-to-Growth Ratio
and representative sample of stocks. The range of scores in the array of this sample
PV- Present Value
has been aligned with the following ladder of rankings:
R&D- Research & Development
A+ Highest
B+ Average
C Lowest
A High
B Below Average
D In Reorganization
A- Above Average
B- Lower
NR Not Ranked
ROE- Return on Equity
ROI- Return on Investment
ROIC- Return on Invested Capital
ROA- Return on Assets
S&P Issuer Credit Rating - A Standard & Poor’s Issuer Credit Rating is a current
SG&A- Selling, General & Administrative Expenses
opinion of an obligor’s overall financial capacity (its creditworthiness) to pay its
WACC- Weighted Average Cost of Capital
financial obligations. This opinion focuses on the obligor’s capacity and willingness
to meet its financial commitments as they come due. It does not apply to any specific
financial obligation, as it does not take into account the nature of and provisions of
the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the
Disclosures/Disclaimers
legality and enforceability of the obligation. In addition, it does not take into account
the creditworthiness of the guarantors, insurers, or other forms of credit
enhancement on the obligation.
S&P Capital IQ EPS Estimates – S&P Capital IQ earnings per share (EPS) estimates
reflect analyst projections of future EPS from continuing operations, and generally
exclude various items that are viewed as special, non-recurring, or extraordinary.
Also, S&P Capital IQ EPS estimates reflect either forecasts of S&P Capital IQ equity
analysts; or, the consensus (average) EPS estimate, which are independently
compiled by Capital IQ, a data provider to S&P Capital IQ Equity Research. Among the
items typically excluded from EPS estimates are asset sale gains; impairment,
restructuring or merger-related charges; legal and insurance settlements; in process
research and development expenses; gains or losses on the extinguishment of debt;
the cumulative effect of accounting changes; and earnings related to operations that
have been classified by the company as discontinued. The inclusion of some items,
Required Disclosures
In contrast to the qualitative STARS recommendations covered in this report, which
are determined and assigned by S&P equity analysts, S&P’s quantitative evaluations
are derived from S&P’s proprietary Fair Value quantitative model. In particular, the
Fair Value Ranking methodology is a relative ranking methodology, whereas the
STARS methodology is not. Because the Fair Value model and the STARS
methodology reflect different
criteria, assumptions
and
analytical
methods,
quantitative evaluations may at times differ from (or even contradict) an equity
analyst’s STARS recommendations. As a quantitative model, Fair Value relies on
history and consensus estimates and does not introduce an element of subjectivity as
can be the case with equity analysts in assigning STARS recommendations.
such as stock option expense and recurring types of other charges, may vary, and
depend on such factors as industry practice, analyst judgment, and the extent to
which some types of data is disclosed by companies.
S&P Global STARS Distribution
S&P Core Earnings - Standard & Poor's Core Earnings is a uniform methodology for
adjusting operating earnings by focusing on a company's after-tax earnings
In North America
generated from its principal businesses. Included in the Standard & Poor's definition
As of March 31, 2013, research analysts at Standard & Poor’s Equity Research
are employee stock option grant expenses, pension costs, restructuring charges from
Services U.S. recommended 35.0% of issuers with buy recommendations, 56.0% with
ongoing operations, write-downs of depreciable or amortizable operating assets,
hold recommendations and 9.0% with sell recommendations.
purchased research and development, M&A related expenses and unrealized
In Europe
gains/losses from hedging activities. Excluded from the definition are pension gains,
impairment of goodwill charges, gains or losses from asset sales, reversal of prior-
Services Europe recommended 27.7% of issuers with buy recommendations, 48.6%
year charges and provision from litigation or insurance settlements.
with hold recommendations and 23.7% with sell recommendations.
S&P 12 Month Target Price – The S&P equity analyst’s projection of the market price
In Asia
a given security will command 12 months hence, based on a combination of intrinsic,
relative, and private market valuation metrics.
Services Asia recommended 38.7% of issuers with buy recommendations, 50.3% with
hold recommendations and 11.0% with sell recommendations.
S&P Capital IQ
Equity Research
30
Globally
regulated by the Securities Commission; in Australia by Standard & Poor’s
Information Services (Australia) Pty Ltd (“SPIS”), which is regulated by the Australian
Services globally recommended 34.3% of issuers with buy recommendations, 54.2%
Securities & Investments Commission; and in Korea by SPIAS, which is also
with hold recommendations and 11.5% with sell recommendations.
registered in Korea as a cross-border investment advisory company.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a
The research and analytical services performed by SPIAS, McGraw-Hill Financial
relevant benchmark, by a wide margin over the coming 12 months, with shares rising
Research Europe Limited, MHFSPL, S&PM and SPIS are each conducted separately
in price on an absolute basis.
from any other analytical activity of Standard & Poor’s.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant
Standard & Poor's or an affiliate may license certain intellectual property or provide
benchmark over the coming 12 months, with shares rising in price on an absolute
pricing or other services to, or otherwise have a financial interest in, certain issuers of
basis.
securities, including exchange-traded investments whose investment objective is to
3-STARS (Hold): Total return is expected to closely approximate the total return of a
relevant benchmark over the coming 12 months, with shares generally rising in price
on an absolute basis.
substantially replicate the returns of a proprietary Standard & Poor's index, such as
the S&P 500. In cases where Standard & Poor's or an affiliate is paid fees that are tied
to the amount of assets that are invested in the fund or the volume of trading activity
in the fund, investment in the fund will generally result in Standard & Poor's or an
2-STARS (Sell): Total return is expected to underperform the total return of a
affiliate earning compensation in addition to the subscription fees or other
relevant benchmark over the coming 12 months, and the share price is not
compensation for services rendered by Standard & Poor’s. A reference to a particular
anticipated to show a gain.
investment or security by Standard & Poor’s and/or one of its affiliates is not a
recommendation to buy, sell, or hold such investment or security, nor is it considered
1-STARS (Strong Sell): Total return is expected to underperform the total return of a
to be investment advice.
relevant benchmark by a wide margin over the coming 12 months, with shares falling
in price on an absolute basis.
Indexes are unmanaged, statistical composites and their returns do not include
payment of any sales charges or fees an investor would pay to purchase the
Relevant benchmarks: In North America the relevant benchmark is the S&P 500 Index,
in Europe and in Asia, the relevant benchmarks are generally the S&P Europe 350
securities they represent. Such costs would lower performance. It is not possible to
invest directly in an index.
Index and the S&P Asia 50 Index.
Standard & Poor's and its affiliates provide a wide range of services to, or relating to,
For All Regions:
All of the views expressed in this research report accurately reflect the research
analyst's personal views regarding any and all of the subject securities or issuers. No
part of analyst compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed in this research report. Analysts
many organizations, including issuers of securities, investment advisers, brokerdealers, investment banks, other financial institutions and financial intermediaries,
and accordingly may receive fees or other economic benefits from those
organizations, including organizations whose securities or services they may
recommend, rate, include in model portfolios, evaluate or otherwise address.
generally update stock reports at least four times each year.
For details on the S&P Capital IQ research objectivity and conflict-of-interest policies,
S&P Global Quantitative
Recommendations Distribution
please visit:
http://www.standardandpoors.com/products-services/equity-research-main/en/us/
S&P Capital IQ and/or one of its affiliates has performed services for and received
In North America
compensation from this company during the past twelve months.
As of March 31, 2013, Standard & Poor’s Quantitative Services North America
recommended 40.0% of issuers with buy recommendations, 20.0% with hold
recommendations and 40.0% with sell recommendations.
Disclaimers
In Europe
With respect to reports issued to clients in a language other than English and in the
As of March 31, 2013, Standard & Poor’s Quantitative Services Europe recommended
case of inconsistencies between the English and translated versions of a report, the
42.3% of issuers with buy recommendations, 22.5% with hold recommendations and
English version prevails. Neither S&P nor its affiliates guarantee the accuracy of the
35.2% with sell recommendations.
translation. Assumptions, opinions and estimates constitute our judgment as of the
date of this material and are subject to change without notice. Past performance is
In Asia
not necessarily indicative of future results.
As of March 31, 2013, Standard & Poor’s Quantitative Services Asia recommended
50.6% of issuers with buy recommendations, 18.7% with hold recommendations and
Standard & Poor’s, its affiliates, and any third-party providers, as well as their
30.7% with sell recommendations.
directors, officers, shareholders, employees or agents (collectively S&P Parties) do
not guarantee the accuracy, completeness or adequacy of this material, and S&P
Globally
Parties shall have no liability for any errors, omissions, or interruptions therein,
As of March 31, 2013, Standard & Poor’s Quantitative Services globally
regardless of the cause, or for the results obtained from the use of the information
recommended 45.2% of issuers with buy recommendations, 20.0% with hold
provided by the S&P Parties. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR
recommendations and 34.8% with sell recommendations.
IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF
Other Disclosures
MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
This report has been prepared and issued by Standard & Poor’s and/or one of its
affiliates. In the United States, research reports are prepared by Standard & Poor’s
Investment Advisory Services LLC (“SPIAS”). In the United States, research reports
are issued by Standard & Poor’s (“S&P”); in the United Kingdom by McGraw-Hill
Financial Research Europe Limited which is authorized and regulated by the Financial
USE. In no event shall S&P Parties be liable to any party for any direct, indirect,
incidental, exemplary, compensatory, punitive, special or consequential damages,
costs, expenses, legal fees, or losses (including, without limitation, lost income or lost
profits and opportunity costs) in connection with any use of the information
contained in this document even if advised of the possibility of such damages.
Capital IQ is a business of Standard & Poor's.
Conduct Authority and trades as Standard & Poor’s; in Hong Kong by Standard &
Ratings from Standard & Poor’s Ratings Services are statements of opinion as of the
Poor’s Investment Advisory Services (HK) Limited, which is regulated by the Hong
date they are expressed and not statements of fact or recommendations to purchase,
Kong Securities Futures Commission; in Singapore by McGraw-Hill Financial
hold, or sell any securities or to make any investment decisions. Standard & Poor’s
Singapore Pte. Limited (MHFSPL), which is regulated by the Monetary Authority of
assumes no obligation to update its opinions following publication in any form or
Singapore; in Malaysia by Standard & Poor’s Malaysia Sdn Bhd (“S&PM”), which is
format. Standard & Poor’s ratings should not be relied on and are not substitutes for
S&P Capital IQ
Equity Research
31
the skill, judgment and experience of the user, its management, employees, advisors
recommendation of particular securities, financial instruments or strategies to you.
and/or clients when making investment and other business decisions. Standard &
Before acting on any recommendation in this material, you should consider whether
Poor’s rating opinions do not address the suitability of any security. Standard &
it is suitable for your particular circumstances and, if necessary, seek professional
Poor’s does not act as a fiduciary. While Standard & Poor’s has obtained information
advice.
from sources it believes to be reliable, Standard & Poor’s does not perform an audit
and undertakes no duty of due diligence or independent verification of any
Additional information is available upon request.
information it receives.
Standard & Poor’s keeps certain activities of its business units separate from each
other in order to preserve the independence and objectivity of their respective
activities. As a result, certain business units of Standard & Poor’s may have
This document does not constitute an offer of services in jurisdictions where
Standard & Poor’s or its affiliates do not have the necessary licenses.
information that is not available to other Standard & Poor’s business units. Standard
For residents of the U.K. - This report is only directed at and should only be relied on
& Poor’s has established policies and procedures to maintain the confidentiality of
by persons outside of the United Kingdom or persons who are inside the United
certain non-public information received in connection with each analytical process.
Kingdom and who have professional experience in matters relating to investments or
Standard & Poor’s Ratings Services did not participate in the development of this
report. Standard & Poor’s may receive compensation for its ratings and certain creditrelated analyses, normally from issuers or underwriters of securities or from obligors.
who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of
the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005,
respectively.
Standard & Poor’s reserves the right to disseminate its opinions and analyses.
For residents of Singapore - Anything herein that may be construed as a
Standard & Poor’s public ratings and analyses are made available on its Web sites,
recommendation is intended for general circulation and does not take into account
www.standardandpoors.com (free of charge), and www.ratingsdirect.com and
the specific investment objectives, financial situation or particular needs of any
www.globalcreditportal.com (subscription), and may be distributed through other
particular person. Advice should be sought from a financial adviser regarding the
means, including via Standard & Poor’s publications and third-party redistributors.
suitability of an investment, taking into account the specific investment objectives,
Additional
financial
information
about
our
ratings
fees
is
available
at
www.standardandpoors.com/usratingsfees.
This material is not intended as an offer or solicitation for the purchase or sale of any
situation
or
particular
needs
of
any
person
in
receipt
of
the
recommendation, before the person makes a commitment to purchase the
investment product.
security or other financial instrument. Securities, financial instruments or strategies
For residents of Malaysia - All queries in relation to this report should be referred to
mentioned herein may not be suitable for all investors. Any opinions expressed
Ching Wah Tam.
herein are given in good faith, are subject to change without notice, and are only
current as of the stated date of their issue. Prices, values, or income from any
For residents of Indonesia - This research report does not constitute an offering
securities or investments mentioned in this report may fall against the interests of the
document and it should not be construed as an offer of securities in Indonesia, and
investor and the investor may get back less than the amount invested. Where an
that any such securities will only be offered or sold through a financial institution.
investment is described as being likely to yield income, please note that the amount
of income that the investor will receive from such an investment may fluctuate.
Where an investment or security is denominated in a different currency to the
investor’s currency of reference, changes in rates of exchange may have an adverse
effect on the value, price or income of or from that investment to the investor. The
For residents of the Philippines - The securities being offered or sold have not been
registered with the Securities and Exchange Commission under the Securities
Regulation Code of the Philippines. Any future offer or sale thereof is subject to
registration requirements under the Code unless such offer or sale qualifies as an
exempt transaction.
information contained in this report does not constitute advice on the tax
consequences of making any particular investment decision. This material is not
STANDARD & POOR’S, S&P, S&P 500, S&P Europe 350 and STARS are registered
intended for any specific investor and does not take into account your particular
trademarks of Standard & Poor’s Financial Services LLC.
investment objectives, financial situations or needs and is not intended as a
S&P Capital IQ
Equity Research
32

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