June 02, 2016 | Price: $1.12

Growth Portfolio

Overview: WPP AUNZ Ltd (“WPP”, “the Company”), formerly STW Communications Limited, is an Australian services company focused on advertising, marketing, and communications. The company’s advertising channels include television, radio, print, outdoor and electronic. In April 2016, the Company merged with the Australian and New Zealand business of WPP plc (“WPP”) which forms an entity that generates Pro-forma sales of ~$850million pa.

Catalysts: The merger of STW and WPP combines two of the largest participants in the local marketing industry and is expected to yield cost savings of $15m and more favourable debt facilities. While STW as a single entity has posted six consecutive years of revenue growth, merging with WPP should increase competitive barriers further. Successful integration of the two individual businesses and consolidation of the industry is expected to be the primary drivers.

Hurdles: With Federal election campaigns underway, the Company may be challenged maintaining current utilisation rates, which could represent a cyclical peak. The merger is subject to integration risks and there is no guarantee that synergies will arise, nor that cost savings will occur. Whilst the merger reduces balance sheet leverage to ~2x EBITDA, these borrowings may constrain the Company’s ability to expand.

Investment View: WPP offers profitable exposure to the domestic marketing and advertising industry. The merger represents a major rationalisation of the domestic ad services industry and synergies could drive margin growth. Integration risks, balance sheet gearing, and post-election market momentum are principal risks. New debt facilities provide WPP with sufficient working capital to unlock value from the transaction. Attracted to the competitive position of this newly formed entity, we initiate coverage with a ‘buy’ recommendation.

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