Shore Capital has pulled back its rating for WPP group PLC (LON:WPP) to ‘hold’ from ‘buy’ as it expects short-term pricing pressures to prove tougher and more sustained for the blue chip advertising giant.
In a note to clients, ShoreCap’s analysts said: “We are positive on many of WPP’s underlying attractions including: the strength and quality of its operations and brands, its international footprint, record of innovation and new business wins, cost focus, and overweight exposure versus its peers to digital and less well-developed regions.
“We also note the positive momentum suggested by recent updates from the company.”
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But they added: “That said, a visit to last week’s Cannes Lions media festival where we were able to discuss the current dynamics of the advertising industry with a broad range of participants and stakeholders has prompted us to adopt a more cautious view on its trading environment.
“Specifically, we believe that the short term pricing pressure we highlighted in our last update comment is likely to prove a tougher and more sustained headwind than previously perceived (with pressure coming from both clients and competitors), and that new entrants offering a stripped down and lower cost service (e.g. Accenture and business services companies such as PWC) are likely to prove increasingly disruptive.”
They said they were not making any changes to forecasts for WPP and noted that recent guidance from the company at its AGM update on June 8 was consistent with their full year expectations.
But, the analysts added: “That said, our sense is that the risk to consensus is edging towards the downside - so we will monitor this position going forward.”
And they concluded: “Against this backdrop and despite a period of muted share price performance, we believe the group’s current valuation (FY17E and FY18E P/E / DY ratios of 13.0x / 3.8% and 12.4x / 4.0% respectively) looks fair rather than cheap, and we do not see an obvious catalyst for a re-rating.”