Broker tips: Mitie, WPP

The brokerage said the market has yet to appreciate the full extent of the potential turnaround at Mitie under new leadership.

"While execution risks remain, we see considerable upside to profitability on even a conservative assessment of possible cost savings and operating efficiencies. In a relatively short period, management has largely drawn a line under balance sheet risk and plotted a realistic path back to operating margins above 5%."

Investec's new base case assumes Mitie achieves around £35m of the planned £45m net savings by FY20E, driving upgrades to its earnings per share forecasts of 4-8%. The brokerage reckons that £10m of the total savings target have already been secured during FY17 and on this basis, its FY18E-20 EPS estimates are 7-12% above current consensus.

Investec pointed out that strengthening the balance sheet has been a key area for management and said it believes material progress has already been made. Its analysis suggests Mitie can reach the target 2.0x average net debt/EBITDA by FY20, down from 3.5x in FY17.

In addition, the brokerage argued that the company's discount to its facilities management peers should narrow.

Advertising giant WPP is likely to see its earnings growth model squeezed due to its high exposure to spending from consumer staples companies, argued Deutsche Bank as it downgraded the shares to a 'hold'.

Deutsche, which cut its target price to 1,750p from 1,890p and swapped its preference for rival Publicis, said it disagreed with the market's increasingly prevalent view that advertising agencies are losers in a structural shift, caught in the middle between the tech giants and the consulting behemoths.

"Counter to consensus, we think the agencies can cope with the perceived structural threats, which include fee pressure, commoditisation of media buying and competition from consultants. These concerns are now reflected in current valuations, with the low-growth but cash-generative agency stocks in value territory," analyst Chris Collett said.

He now believes WPP's long-term model for delivering 10-15% annual growth in earnings per share "will come under pressure due to high exposure to staples companies, margins that are starting to push towards the company's targeted ceiling and acquisition-led growth, which is adding to complexity instead of reducing it".

The long-term positive stance on WPP was reversed, with organic net sales growth cut to 1.2% from 2.1% which is below Vuma consensus growth of 2.0% and Deutsche's estimate of agency industry growth of 3.2%.

Meanwhile the previous neutral or sceptical view on Publicis was also reversed, now seen as well positioned thanks to its new CEO driving change, recent moves to integrate agency silos, exposure to consulting and margin growth potential, which could deliver 8% EPS upside in 2018.

Its strong balance sheet could enable future cash returns, Collett thought.