UBS starts WPP at 'buy', says risk/reward skewed to upside

Advertising giant WPP got a boost on Tuesday as UBS initiated coverage of the stock at 'buy' with a 2,050p price target, saying the risk/reward balance is skewed to the upside.

The bank said that on 12.3x full-year 2018 price-to-earnings with an 8.6% equity free cash flow yield, the valuation look attractive after the stock fell 15% year-to-date following weak 2017 guidance. In addition, a net sales recovery in the second half of this year should provide a catalyst for a re-rating.

"While structural threats exist, we believe they are more than priced in: the market appears to be discounting circa 1% net sales growth at flat margins versus our estimate of 3.7% including M&A (2% organic) and historical agency holding companies sector growth of 6% (4% ex M&A)."

UBS said WPP looks well place to deliver earnings per share growth, albeit at a slower rate. For FY17-21, the bank forecasts EPS growth of 7% compound annual growth rate versus 11% FY11-16 and WPP's long-term guidance of 10-15%.

"Media buying scale, proprietary data assets, digital strength, a strong geographical mix and a smaller creative exposure should see WPP grow broadly in line with the market. Cost-out (IT and property), capital management (buybacks) and M&A should add to growth despite tax headwinds. FX should also provide a tailwind in FY17-18 (UK 13% of sales)."

At 1000 BST, the shares were up 1.6% to 1,696p.