View from City Road: Saatchi's air of gloom persists

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ROBERT LOUIS-DREYFUS likes to use his easy smile and quickfire sense of humour to parry difficult questions about the advertising agency Saatchi & Saatchi, where he is chief executive.

But there is one overriding issue he has not been able to avoid. Despite being able to report profits for the first time since he took over as chief executive, a cloud of economic gloom hangs loftily over Saatchi.

Mr Louis-Dreyfus is all too aware that there is little sign of improvement in many of its markets. Yesterday's figures of taxable profits of pounds 11.1m ( pounds 32m loss) may have been above expectations, but the watchword for shareholders is still caution.

Brought in as a troubleshooter two and a half years ago, Mr Louis-Dreyfus will no doubt be judged as a success when he stands down next year. The dramatic recapitalisation, disposals, reduction in debt and job cuts all put Saatchi on a firmer footing. The worst is over.

While the company now looks set to make pounds 20m in the full year, more evidence of a sustained upturn in advertising is needed before the shares, up 5p to 136p should be bought.

There are some encouraging signs, in television for instance, but there needs to be a broader recovery.

The advertising market is expected to grow by 5.8 per cent next year, but Saatchi is unlikely to match the pace in terms of revenue if not profits, which will continue to be boosted by its cost-cutting.

James Capel, the broker, has cut its profits forecast for next year from pounds 41m to pounds 35m and for the year after from pounds 66m to pounds 60m.

The US and UK markets remain sluggish, with revenues down 3 and 4 per cent respectively. Although the agency picked up a couple of new clients at the start of the year the level of new business has tailed off, suggesting revenues will stay at about the same level as last year.

Since the outlook is for slow growth, Saatchi has to do all it can to retain existing clients in the increasingly competitive environment.

Given the way Saatchi has haemorrhaged money in the past few years it is surprising that it remains the world's second largest advertising agency. It only goes to underline the parlous state of the sector.