Investment Column: WPP offers value as ad spending recovers

Eaga; William Sinclair
Click to follow
The Independent Online

Our view: Buy

Share price: 710p (+4.5p)

Sir Martin Sorrell rarely minces words when he talks about the state of the advertising market. Speaking at the WPP's annual results in March, he said the industry may have narrowly avoided "apocalypse now" in what had been a brutal 12 months. Pre-tax profits fell 16 per cent, but in a year of two halves, fortunes improved steadily.

The company said it was in a "stabilising" phase but is still to return to growth. Yet signs have been positive. Recent analysis shows a cause for optimism in television advertising in the UK in the first half of 2010, with potential for a wider recovery. What is good for advertising will also be good for WPP. The group has been on a roadshow since its results and is taking positive messages to its investors. It has been buoyed by a strong rebound in advertising dollars in the US so far this year, and it expects the trend to continue at least until the mid-term elections in November. Asia has also rebounded.

Another key focus for WPP this year will be emerging markets, which are expected to make up a third of group revenues within five years, from 27 per cent currently.

Advertising, media buying and planning makes up 38 per cent of the group's revenues, with market research at 26 per cent, public relations at 10 per cent and specialist communications at 26 per cent. The latter, which covers direct marketing and digital, is expected to be another key engine for growth. The problems for the group lie in Europe, which it calls a very difficult market, and continued economic uncertainty. Yet, Chris Sweetland, the deputy group deputy finance director, believes the breadth of the company's operations and geographical spread leaves it protected. At a valuation of around 12.5 times estimated 2010 earnings, on Bank of America Merrill Lynch's calculation, the share price looks undemanding, at least in the short term. Buy


Our view: Hold

Share price: 138p (-0.1p)

The population at large could be forgiven for getting a little bit irked by the general election campaign, even if it is only a week or so old. But for companies like Eaga, the energy efficiency group, the contest is having a real effect on the bottom line.

The company said yesterday that uncertainty over the vote had hit demand from some customers as they worry about what will come out of the melting pot once the result is known. However, trading is still in line with expectations, the group said, adding that regulations are a key driver for its growth. A spokesman for the group said that yesterday's trading statement represented business as usual and is steady as she goes. That should worry investors.

The group's stock has lost ground in the last 12 months, falling by just over one per cent, just as other shares have put on big gains. The company argues that the drop is unexplainable and that the company performed well during the recession.

If investors can get over the inertia in the share price, they will find a popular stock among analysts. Those at Collins Stewart point out that trading on 9.3 times 2010 forecast earnings makes the shares good value, and think Eaga will be trading at 180p within the year. Beyond post-election certainty we don't see much oomph behind the stock, although the 2010 dividend yield of 2.9 per cent is solid, if still somewhat unexciting. So hold.

William Sinclair

Our view: Buy

Share price: 112.5p (+1.5p)

William Sinclair is a little piece of gold within the muck. The company will be known to gardeners around the UK through its J Arther Bower's and New Horizon brands, which produce a range of garden related paraphernalia that includes everything from hanging baskets to compost.

It was the latter that provided the excitement in yesterday's trading update. The company has received a £9m advance payment from the Government for ceasing peat harvesting at Bolton Fell Moss in Cumbria. This follows the announcement on 23 March 2010 that the company had reached an interim agreement with Natural England over the future of its peat bog operations there. Harvesting peat for compost is deemed environmentally unfriendly because peat is fixed carbon and because all sorts of rare plants, particularly carnivorous ones, can be found in peat bogs.

William Sinclair has the leading non-peat compost product too (sales were up 44 per cent in the six months to 31 March), so the move away from peat benefits the group on both sides. With garden-friendly weather helping trading, this is a stock on the move. Not cheap at around 16 times full-year forecast earnings, but the potential makes us confident buyers.