Advertising market 'is improving', Barclays upgrades ITV but cuts WPP

Advertising is improving in the UK and media buyers are revising up their expectations for 2018, Barclays reported, leading to it upgrading ITV and lifting its share price target but downgrading WPP.

Barclays lifted ITV to an 'overweight' rating from 'equal weight' and raised its price target to 200p from 190p due to the improving UK advertising momentum and with its current valuation felt to be ignoring the non-television businesses.

The bank also lowered WPP to 'equal weight' from 'overweight'.

The improvement in the UK ad market comes with media buyers calling September to November flat, which Barclays said means ITV should deliver a third-quarter result at the top of the guidance given for ITV Family net ad revenue to be down around 4% in Q3 with July down 5%, August down 4%, September flat to down 5%.

If December is also flat, then analysts calculated that full year NAR should decline 4.5% versus the consensus estimate of a 5.8% fall.

Furthermore, while it is felt too early to definitively call 2018, "media buyers are revising up their thinking to flat from negative and some are mentioning a flow back to television from digital".

The first-half of 2018 will benefit from 'easy' comparative figures this year, "implying that ITV could post positive advertising numbers in Q1 and Q2 which will lessen structural worries," analysts said.

Finally, ITV's valuation is felt to give "little credit to ITV for their non-television businesses", forecasting the group's content, online and interactive segments can allow the group to still grow earnings per share 7% a year even with television advertising flat.

On WPP, Barclays saw "very high uncertainty" for 2018 organic growth and margins.

"Firstly, if agencies are right and the only reason for 2017 softness is clients putting pressure on their suppliers including agencies, then why won’t we see a repeat in 2018?

"If clients get the same service from agencies on lower fees in 2017, then why won’t they lower fees again in 2018?"

The third quarter of the current year is expected to be weak, which implies risks for the full year guidance.

CEO Martin Sorrell said recently that “August was a little bit more encouraging than July, but you saw the July numbers and they weren't anything to write home about”.

If we assume August and September are down 1.0%, then Q3 will be down 1.5% and require Q4 to be up 2.7% to make FY17
consensus at 0.2%.

"Overall, WPP is very inexpensive but you have short-term earning risks and a higher level of forecasting error on 2018 where consensus still has 1.9% organic growth."