I. Sector landscape and outlook

Advertising plays a crucial role in communicating the value premise of a company’s product and services and affect the buying behaviour of consumers in a free market system. It is a one-way communication where brands communicate their message through a varied range of media platforms to customers. The significant objectives of advertising are brand building, ramping up sales, demand creation, engagement, and enhancing the customer base. Over the years, the advertising industry has witnessed a paradigm shift and evolved from traditional media platforms such as print, TV, and radio to digital advertising which revolves around online activities such as display, pay-per-click and social media advertising. The vested interest behind advertising is to attract new customers by defining the target market, influence their buying behaviour and to reach out to the target audience with an effective campaign. Advertising plays a vital role in creating customer confidence and increasing economic activity.

Global Advertising Markets

The United States is the leading advertising market in terms of advertising spending. In the year 2019, the country invested about USD 243 billion in promotional activities. This was approximately 2.5 times than the closest competitor, China, whose advertising expenditure during the same year stood at USD 91 billion. Japan stood third in the league, and the United Kingdom is the fourth-largest market in terms of advertising spending. The global advertising spending in 2019 stood at USD 563 billion, and over the past ten years, advertisement spending has increased with a CAGR of 41% between (2010-2019). (Data source: Statista)

Fig 1: Global Advertising Spending (In USD Billions, 2010-2019)

Source: Statista

A Closer View to Advertisement Market

TV and radio

The global TV ad market spending in 2018 stood at USD 182 billion and expected to shrink, though at a slower pace to USD 178 billion by 2021. According to a report published by Statista, Central and Eastern Europe, together with Latin America, are only markets where a potential growth in the TV ad market expected to grow. The global radio market is also expected to grow by ~USD 1 billion by 2021 on account of technological advancement in content format. (Data Source: Statista)

Print Media

Advertisement market in the print media is gradually shrinking due to significant penetration of the digital channels. Newspapers and Magazines both witnessed a reduction in ad revenue, and industry experts do not see a solid future of print media. In 2018, the global spending on magazine ads stood at USD 26.8 billion (according to Statista report) and expected to narrow down to USD 21 billion by 2021. On the other side, spending in newspaper ads is expected to shrink to USD 40 billion by 2021 from USD 47 billion reported in the year 2018.

Digital and Mobile

Digital and Mobile channels are expected to grow at a faster pace compared to other channels such as TV, Radio and Print Media. In the year 2019, global spending on digital channels stood at USD 333.25 billion, and it is expected to cross USD 517 billion by 2023. On the other side, mobile advertisement spending was at USD 159.9 billion in 2018 and expected to surpass USD 250.5 billion by 2021. The highest mobile ad revenue came from the retail sector in the year 2018 and registered a growth of 44% against 2017. Google generated a revenue of USD 116 billion from digital advertising, whereas Facebook generated USD 55 billion, and Twitter reported USD 2.6 billion of ad revenue in the year 2018. (Data Source: Statista)

The UK Scenario

The United Kingdom is among the best performing advertising market. The UK advertisement spending increased by 4.2% on a YoY basis and reached GBP 6 billion in the first quarter of 2019, marking the 23^rd consecutive quarter of growth. According to the Advertising Association/WARC Expenditure Report, the UK advertisement spending in 2019 stood at GBP 24.6 billion, up 4.6% on an annual basis.

UK Ad Market – Key Statistics

According to official UK Government data released in February 2020, advertising and marketing generate Gross Value Added (GVA) of GBP 18.6 billion. Employment in UK advertising and marketing grew by ~31% between 2011-2018.  There were ~195,000 people working in the UK advertising and marketing industries in 2018.

In March 2020, the Advertising Association published the UK Advertising Exports Report 2019 –showing international trade in UK advertising services reached GBP 7.9 billion in 2018. This represents a 15% annual increase compared to a 2% rise across the whole of UK service exports. The value of advertising services exports more than doubled between 2009 and 2018 from GBP 2.4 billion to GBP 7.9 billion. The UK’s balance of payments surplus for advertising is also estimated to be the biggest in Europe at GBP 3.6 billion.

A V-Shape Recovery is Expected Post COVID-19 Pandemic

The advertising market is set for a "V-shaped" recovery after the financial impact of the Covid-19 crisis. In April, the Advertising Association and Warc forecast that the UK ad market would fall by 39% in the second quarter, 24% in the third quarter and 9% in the fourth quarter. However, according to industry experts, advertisers would cut advertisement spending for a very short-term period. In particular, it seems that advertisers look sensitive to the long-term risk associated with cutting too much. Further, in the ad space, FMCG is contributing handsomely and will continue to do so in recovery, while healthcare and pharmaceutical companies are also well placed to contribute to the advertisement spending. 

Outlook

The Digital advertisement spending is expected to grow at a faster pace in future; also, it seems that digital advertising market appears to have largely recovered from the disruption caused by the coronavirus pandemic. According to Campaign report, average cost-per-click advertising of Facebook and sister platform Instagram is now back at pre-lockdown levels in late May 2020; however, Google is still down on pre-lockdown levels. Also, as the lockdown restriction on various economic activities is lifting in the UK and across the world, with China eased its lockdown measured long-back; it is expected that advertisement spending would start recovering from a steep plunge in the month of March and April.

Also, advertising companies listed on the London Stock Exchange has reported some recovery over a month period after a steep plunge. Theses companies plunged by 29.3% (on an average) on a YTD basis with Reach4Entertainment Enterprises Plc, Bidstack Group PLC and Hyve Group PLC are among the hardest hit at the same time. However, on an average basis, the sector has recovered approximately 5.8% in a month over period, with 4imprint Group PLC, WPP PLC, Mediazest PLC, Mission Group PLC, Ascential PLC are featuring in green on the LSE. This shows that the operating environment for the sector is recovering from the crisis and gradual reopening of the economies across the globe could benefit these companies further.

Risks:  A next round lockdown in the wake of another outbreak of COVID-19 would have a significant weigh on the players operating within the space. The business condition has already jolted across the board and companies are cutting and suspending expenses to maintain adequate liquidity with them to sustain amid challenging times and to strengthen the balance sheet.


II. Investment theme and stocks under discussion (WPP, FOUR, NFC and ASCL)


After understanding the recent trends in the industry, let’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on Price/Sales.
 

Fig 2: Relative performance of the stocks under discussion against FTSE 100 (3 Months)



1. LSE: WPP (WPP PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP 7.68 Billion)

The company is engaged in providing a range of services which include advertising, media investment management, data investment management; public relations and public affairs; branding and identity; healthcare communications; direct, digital, promotion and relationship marketing, and specialist communications.

 
 
 


Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~23% over the current price of GBX 623.4 at 2:00 PM GMT on 30 June 2020. We have considered ITV PLC (LSE: ITV), Informa PLC (LSE: INF) and Pearson PLC (LSE: PSON) etc., as a peer group for the comparison purpose.




2. LSE: FOUR (4IMPRINT GROUP PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP 702.1 Million)

4imprint Group plc is a direct marketer of products in the United States, Canada, the United Kingdom and Ireland.

 
 


Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~21.8% over the current price of GBX 2,450 at 2:00 PM GMT on 30 June 2020. We have considered WPP PLC (LSE: WPP), Ascential PLC (LSE: ASCL) and Next Fifteen Communications Group PLC (LSE: NFC) etc., as a peer group for the comparison purpose



3. LSE: NFC (NEXT FIFTEEN COMMUNICATIONS GROUP PLC)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: GBP 312.7 Million)

Next Fifteen Communications Group plc is engaged in the communications business. The company consists of approximately 20 subsidiary agencies, spanning digital content, marketing, public relation (PR), consumer, technology, marketing software, market research, public affairs and policy communications.





Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~21.7% over the current price of GBX 356 at 2:00 PM GMT on 30 June 2020. We have considered Hyve Group PLC (LSE: HYVE), Euromoney Institutional Investor PLC (LSE: ERM) and Bloomsbury Publishing PLC (ASX: BLPU) etc., as a peer group for the comparison purpose.



 
4. LSE: ASCL (ASCENTIAL PLC)

(Recommendation: Watch, Potential Upside: Low Single Digit, Mcap: GBP 1.15 Billion)

Ascential plc is a United Kingdom-based business-to-business information company. The company is focused on essential products that connect and inform business professionals using digital economy.

 
 
 

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~1.7% over the current price of GBX 292 at 2:00 PM GMT on 30 June 2020. We have considered Informa PLC (LSE: NFC), Moneysupermarket.Com Group PLC (LSE: MONY) and Wolters Kluwer NV (ASX: WLSNc) etc., as a peer group for the comparison purpose.


 
Note: All the recommendations and the calculations are based on the current price at 2:00 PM GMT on 30 June 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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