Investment Column: Synovate bid rumours weigh on WPP

Charles Stanley; Findel
Click to follow
The Independent Online

Our view: Hold

Share price: 732p (-2.5p)

Marketing group Aegis confirmed on Monday that it was in talks with French rival Ipsos to sell its Synovate market research business.

The result was a spike in the company's shares, which rumbled up to a four-year high. WPP's shares, on the other hand, went the other way as the market digested rumours of whether the advertising giant would wade into the fray with a counter bid.

The Synovate deal is believed to be worth around £500m, but figure could soar if more bidders are drawn in to the fray. The uncertainty around the process has prompted some analysts to reconsider their view of WPP. Alex DeGroote at Panmure said the "possible auction process for Synovate may weigh on WPP's shares, until there is clarity" and knocked his recommendation for the advertising giant's stock down from "buy" to "hold".

Now, there is no doubt that the group, founded by Sir Martin Sorrell, will have followed the Aegis saga with interest. WPP, after all, has shown itself to be an active shopper over the past decade – and it has announced the acquisition of majority stakes in three companies in the past week.

Mr DeGroote, for his part, believes that given the company's current strength and will to expand its market research operation, we will end up seeing it table a rival offer for Synovate.

But does that necessarily cloud the investment case? WPP released a strong first quarter update at the end of April, reporting revenues up 7 per cent to £2.2bn, although some in the market are nervy about a slight slow down since then. Despite maintaining a "buy" rating, Nomura analysts reduced their organic growth forecasts for the company this week from 6 per cent to 4.7 per cent.

In terms of valuation, the stock trades on a forward earnings multiples of 11.6 times. And although that isn't pricey, speculation that it may bid for Synovate would likely spark weakness. So, despite the growing revenues, we think there could be potential for a short-term pullback.

Charles Stanley

Our view: Buy

Share price: 341.75p (+23.13p)

Charles Stanley's chairman, Sir David Howard, spent much of his outlook statement for yesterday's annual results railing against the group's enforced contribution to the Financial Services Compensation Scheme.

The £2.6m levy was "truly astonishing," Sir David complained. It is hard not to sympathise, but even including the charge, the broker and wealth manager turned in a healthy 30 per cent increase in profits at £13.4m on record revenues of £125.6m.

Funds under management rose 13.3 per cent and private client income was up 10.3 per cent. The total dividend will rise 13.8 per cent – ahead of expectations. As Sir David protests, Charles Stanley is a well-run business providing wealth management and investment services to well-off retail clients and institutions.

Whether the company can maintain its performance depends on the performance of the stock market and the behaviour of its clients, who appear to be saving rather than spending.

On a price to forecast earnings ratio of less than 10 per cent the stock looks attractive. For those prepared to ride out choppy economic and market events, the stock is worth buying.


Our view: Sell

Share price: 6.37p (+1.17p)

That Findel is still trading profitably across all divisions is an achievement given what the company has been through. Accounting irregularities at its education division, a rights issue and a plethora of other problems make this a turnaround play. So, is it finally time to dive in?

Findel's biggest business is Express Gifts, which allows those on low incomes to spread the cost of purchases. It also operates Kit Bag, which sells sports merchandise, Kleeneze, a health and beauty home shopping business in addition to education and health supply operations.

At the pre-tax level the company lost money (£1.4m down from £74.8m) thanks to exceptionals and discontinued businesses. But the results could look rather better at the next interims.

Trouble is even after the cash call, the company still has lots of debt – £227m – nearly two and a half times market capitalisation. And the retail climate is chilly. The business is in better shape than it was, but the shares have enjoyed a strong run and, even at just five times next year's forecast earnings, aren't cheap given the risks.