Broker snap: WPP too light on UK exposure

Barclays Capital (BarCap) expects advertising giant WPP to benefit from short-term momentum but sees better value in sector peers with more exposure to the UK.The debt ratings agencies have been down on WPP of late, which has affected the group's access to cheap capital, but this may be about to change. The broker expects the group's near-term performance to be supported by positive ratings actions at both Standard & Poor's and Moody's. "Moody's Baa3 rating appears too low while S&P's Negative Outlook looks inappropriate, in our view," the broker said. "Average net debt has fallen to £3.1bn in 2010, which has taken average net debt/EBITDA [earnings before interest, tax, depreciation and amortisation] to 2.1x, broadly in line with the third quarter's 'approximately 2x' guidance," the broker notes. While welcoming the paying down of debt that resulted from the acquisition of market research firm TNS, BarCap was alarmed to see WPP management claim it has largely achieved its post-TNS deleveraging objective "one year ahead of schedule" as this could suggest the company is ready to go on another buying binge."We are ... concerned that management may prefer to identify inorganic opportunities to accelerate its expansion into faster growing markets, which could weigh on credit metrics," BarCap said.While WPP's UK organic growth (+5.9%) is exceeding emerging markets growth (+5.6%), the overall contribution is less than half the size made by emerging markets, and BarCap prefers publishers and broadcasters such as ITV, Daily Mail and United Business Media, as these have a greater dependency on the UK advertising market.The group's outlook for 2011 is for organic revenue growth of 5% and an expansion of the operating margin by half a percentage point, "which should support continued deleveraging in 2011 provided that management does not choose to increase its exposure to fast-growing markets", says BarCap.BarCap has a 'market weight' recommendation for the shares.