WPP: Xaxis, Branded Entertainment Group M Drive Growth

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Xaxis +27%; Branded Entertainment +207% - Brian Wieser, Pivotal Research

WPP hosted an investor day on Wednesday focused on the holding company's activities in China as well as its global operations in media investment management and measurement. Overall, the presentation highlighted WPP's scale advantage vs. direct competitors in most marketing services fields, and its increasingly important role in marketing and advertising technologies.

Items we thought as notable included the following:

·       As a holding company, WPP's first board meeting was held in the country in 1989. Its commitment to China remains steadfast in the face of softening conditions, and its presence there remains an important element of the company's near-term and long-term value to clients and investors, alike. Today it is by far the largest holding company in the country and the region, with $1.5bn in revenue for Greater China last year. This equates to 8% of last year's holding company total; Greater China is by now the company's third largest territory, equal to around half of their UK business and around one quarter the US business.

·       GroupM China generates ~$250mm in annual revenue on $9bn of annual billings (per RECMA), which are both significant figures. We also thought that a data point on the unit's branded entertainment division was notable. The company expects $10mm in revenue from related activities this year (up by 207% year over year). This is notable as branded entertainment is an increasingly important tactic for marketers and an increasingly important revenue growth source for media agencies around the world.

·       Commentary on global media agency activities highlighted the holding company's overall billings scale, which per RECMA amounted to $106bn last year (vs. Publicis media agencies which totaled $80bn) and its relative success in pitches during this "mediapalooza" year. WPP claims $1bn in net media billings gains from its top five wins and top five losses year-to-date, well-ahead of Publicis and Omnicom, on WPP's estimates (as well as vs. Dentsu on our own estimates). However, on our assessment we think that IPG is probably ahead of all others, with relative gains driven up by a different assessment of the scale of the J&J media buying win and losses mitigated by what we believe is the relative insignificance of the US Heinz loss vs. what WPP has estimated.

·       Xaxis, the company's primary programmatic media sales platform, provided updated estimates on its activity. The unit expects $950mm in gross revenue this year, up by 27% vs. 2014. The company also noted Xaxis presently has 1,100 employees. On these metrics, Xaxis is relatively comparable in scale (if not identical in its specific ad product orientation) to Criteo and Rocket Fuel.

·       Commentary on WPP's data management platforms inside of Xaxis and elsewhere at WPP (within a unit of Wunderman called KBM) highlighted WPP's unique position in having developed two such platforms in-house vs. none that we are aware of at other holding companies. To the extent that DMPs represent highly strategic tools for the marketing services and marketing technology industries, this should prove to be a notable advantage for WPP now and in the future.

VALUATION. At 1450p, our target for WPP equates to a 16x 2016 P/E on a headline basis. We value WPP's operating business with a DCF framework, incorporating an 8.1% near-term discount rate, an 11.5% long-term discount rate and a 4.5% long-term growth rate.

RISKS. Agency risks relate to blowback from the rebate issue, squeezing fees from clients, competition from adjacent industries, reduced competition between marketers and demand for advertising services.


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