Investment column: Saatchi

SAATCHI & SAATCHI, the advertising agency demerged from Cordiant at the end of 1997, has been enjoying its independence. Buoyed by a growing global advertising market, predicted to grow by 4.2 per cent this year, the agency has been winning new business and improving its margins.

The group lent some justification to the rise in its shares from 97p in the autumn to 217p yesterday as it posted a 21 per cent increase in underlying half-year profits to pounds 13.2m. It celebrated the figures by paying a maiden interim dividend.

Almost half of Saatchi's revenues come from the US. The strong economy there has seen the agency win $350m (pounds 217m) of billings, with business from Toyota and Procter & Gamble offsetting losses from Gillette and Anchor butter.

The key figure yesterday was the margin, up from 8 to 8.5 per cent. Saatchi is targeting double-digit margins and wants to hit 12 per cent by 2001. The group's larger competitors - Interpublic, Omnicom and WPP - have higher margins than that, but Saatchi is saddled with a punitive rent, adding a point to the margin, at its central London head office; a lease signed by the Saatchi brothers in 1988 and running until 2011. Meanwhile, relatively tiny Saatchi can't enjoy its rivals' economies of scale.

There are other clouds on the Saatchi horizon, however. One is continental Europe, where lower revenue combined with a high fixed cost base sent profits tumbling by 74 per cent. The other is the consumer cycle, which must be near its peak. On consensus full-year profit forecasts of pounds 37m the shares trade on a forward multiple of 20, a discount to larger rivals. The margin deficiency explains the discount. The margin commitment and recent US success cannot take precedence over risk surrounding Saatchi's markets. The shares are expensive.