WPP responding to treatment

THE INVESTMENT COLUMN

WPP was a model for the advertising sector in the 1980s. By bringing together operations in several sectors of the market - media advertising, public relations, marketing services - the holding company set-up was meant to reduce central costs and benefit from geographic and sectoral diversification. This would offset the traditional problems of advertising firms - an overdependence on key people and the vagaries of the relationship between specific clients and the creative team - and lead to sustainable and predictable profits.

That view came badly unstuck in the early 1990s, as the two main followers of this fashion, Cordiant (then known as Saatchi & Saatchi) and WPP, came near the brink of collapse and shareholders saw their investments plummet in value.

WPP appears to be responding to treatment. The shares at 143.5p remain well below the all-time high of 935p reached in 1987, but the trends look healthier, certainly compared with Cordiant.

Revenue growth has been a key management target. Martin Sorrell, WPP's chief executive, has so far delivered on his promise of pushing up revenues and operating margins, as yesterday's interims amply demonstrate. Full- year revenues are almost sure to exceed 1994's pounds 1.4bn, while pre-tax profits for the period might climb as high as pounds 107m, a strong advance on last year's pounds 85.3m.

Thereafter, the consensus suggests 1996 earnings of pounds 150m, which put the shares on a rating of about 20 times next year's earnings - not out of line when viewed next to the few comparable US-based companies, although certainly not cheap.

Profits have been boosted by cost-cutting, a steady shift from salary- based remuneration to performance-related pay and vigorous debt reduction, leading to lower interest payments. By next year - likely to be a good one for the advertising market, given elections on both sides of the Atlantic and the accompanying attempts to boost the economy - the full effects of the slimming-down process will start to show in the figures.

WPP has several other strengths. It is not overly dependent on its big clients: the top 10, led by Ford, account for only 29 per cent of revenues. It is also more exposed than some of its global competition to the European advertising market, which is growing faster than the US.

Mr Sorrell's massive incentive package could also prove beneficial for investors. If he can take the shares to 304p within five years, and meet other market and peer-group measurements, his bonus will balloon and shareholders will see WPP's market capitalisation rise from just over pounds 1bn to pounds 2.2bn. Stay aboard for the ride.

Rentokil fears

premature

Fears for the early demise of Rentokil are clearly premature. Yesterday's interim results suggest the security to washroom supplies group is still on course to deliver a 14th year of earnings growth above 20 per cent, despite the signs of slowdown that have emerged in the past couple of years.

Profits before tax advanced 23 per cent to pounds 99.2m in the six months to June, with earnings per share growing at the same rate to 6.51p. The figures surprised analysts and the shares spurted 6p to 298p yesterday.

Admittedly, Rentokil received a lift from economic recovery in Europe, an underperformer for the group for the past two years, and foreign exchange gains. Continental operations returned to form, raising profits by over 26 per cent to pounds 25.8m, while the benefits of the weak pound were modest, chipping in just pounds 1.4m to the higher profits.

The other area under par last year was Australia, where management changes seem to have addressed the problems. Profits growth topped 17 per cent in the latest period after two flat years and fed into a 19 per cent uplift to pounds 20.5m in the contribution from the Asia Pacific and Africa regions.

With all cylinders firing properly, Rentokil is moving rapidly to address its continuing bias towards the UK, which at pounds 42m produced 42 per cent of the latest profits. The success of the move into security, following the pounds 75m Securiguard acquisition two years ago, has encouraged Clive Thompson, chief executive, to attempt to repeat the success in America.

Now Britain's third-largest security group, turnover has grown 50 per cent since the addition of Sterling Granada last November, with the critical mass giving scope for cost rationalisation and the chance to raise margins. Last week's $51.5m (pounds 32m) acquisition of the Mayne Nickless operations in North America, will start a similar process across the Atlantic, doubling turnover and putting Rentokil into the top six or seven security companies. Building up the group's European security presence must be the next target, with the US washroom supplies and pest control businesses also high on the list for expansion.

Fire-power will come from Rentokil's phenomenal ability to generate cash, which raised the pile by pounds 29.1m to pounds 96.1m over the six months to June ahead of the latest acquisition. But on forecast profits of pounds 218m for the full year, the prospective multiple of 21 fully reflects the growth prospects.

Recovery fails to

benefit Weir

With the benefit of hindsight, it is clear Weir Group's growth rating in the early 1990s was misplaced. Naturally a late-cycle company, shares in the pumps to fresh water equipment group have struggled since early 1994 as profits failed to reflect the gathering economic recovery.

Contrary to expectations, the economic pick-up has coincided with intensified competition abroad when traditional bread and butter domestic business has been opened up to competition, as in the oil industry, or, like coal- fired power station building, disappeared completely.

The market was prepared for a difficult year after a profits warning in January. Half-time time figures yesterday, showing pre-tax profits up from pounds 18.5m to pounds 20.2m in the six months to June, would have looked much worse but for the unspecified boost they received from the pounds 135m acquisition of EnviroTech Pumpsystems of the US a year ago. In the event, EnviroTech's inclusion for its first full period has been insufficient to offset the dilution effect of last year's cash call, and earnings per share slipped to 7.3p from 8.1p.

The second half should be boosted by the inclusion of profits on projects due to complete before the year-end and the first benefits from the reorganisation of the pumps division, announced earlier this year. Future results should also be underpinned by an order book maintained at pounds 300m, despite Weir's refusal to take on loss-making contracts.

But with demand for power projects declining in Europe and the US showing few signs of recovery, competition between big groups like Asea Brown- Boveri, Siemens and General Electric will remain intense for the remaining Far Eastern business, keeping the squeeze on sub-contractors like Weir.

NatWest Market's forecast of pounds 44m profits this year puts the shares, down 4p to 255p, on a forward multiple of 16. Now just 3p above last year's rights price, they are high enough.

COMPANY RESULTS

Turnover pounds Pre-tax pounds EPS Dividend

Avonside Group (I) 39.5m(38.3m) 1.2m(2.6m) 1.7p (3.9p) 1p(2.1p)

Bridon (I) 165m(150m) 3.5m(3.3m) 4.9p (5.1p) 1.375p(1.25p)

Guinness Peat Group (I) 30.6m(21.3m) 6.9m(5m) 1.14p (0.97p) -(-)

Life Sciences Intl (I) 90.3m(86.8m) 10.6m(13.2m) 3.9p (5p) 1.6p(1.6p)

Monument Oil & Gas (I) 12.7m(14.1m) 6.5m(3.8m) 0.96p (0.51p) -(-)

Michael Page (I) 48.4m(34.1m) 7.6m(4.4m) 7.79p (4.45p) 1.1p(0.8p)

Quicks Group (I) 165m(150m) 2.35m(1.9m) 6.6p (5.3p) 2.5p(2.25p)

Rentokil (I) 391.6m(349.7m) 99.2m(80.6m) 6.51p (5.3p) 1.23p(1.01p)

Shorco (I) 5.7m(4.2m) 313,000(306,000) 3.6p (4.3p) 2p(1.8p)

Slough Estates (I) 88.6m(92.5m) 32.8m(33.3m) 4.9p (4.7p) 3.1p(3.1p)

Weir Group (I) 298m(213m) 20.2m(18.5m) 7.3p (8.1p) 2.2p(2.06p)

WPP Group (I) 3.07bn(2.87bn) 48.5m(36.2m) 3.8p (2.6p) 0.445p(0.385p)

(Q) - Quarterly (F) - Final (I) - Interim

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