Deutsche Bank Unimpressed With Willis Towers Watson Investor Day, Says 2018 EPS View 'A Stretch'

Deutsche Bank remains on the sidelines on Willis Towers Watson PLC WLTW as it believes there are no revenue synergies from the merger and suspects the company's 2018 EPS guidance of $10.10 "could be a stretch" despite meeting other goals.

The company states that given 2017-2018 average revenue growth of 2.5-4.5 percent, a 2018 adj. EBITDA of 25%, and up to 8 million in share count reduction should allow it to achieve its 2018 EPS goal of $10.10.

"However, when the base case is put into practice, WLTW fails to reach $10.10," analyst Joshua Shanker wrote in a note.

Shanker said the company misses its EPS goal by about $0.15, assuming total revenue growth of 2.5 percent in both 2017 and 2018, a 23.5 percent tax rate, a share count decrease of 8 million, and a 2018 25 percent adj. EBITDA margin.

"We also remain skeptical that net revenue synergies can be achieved. Limited downside causes up to maintain our Hold recommendation," analyst Shanker continued.

Management has said that it intends to reach $375 million - $675 million of run-rate revenue synergies by 2018. However, the analyst was surprised on management saying that Exchange revenue synergies are lagging expectations at this point.

The company had expected $100 million - $400 million of exchange-related revenue synergies and is now targeting $100 million - $250 million. This means that revenue synergies other than exchanges are forecasted to be around $275 million, which Shanker do not believe achievable.

"It is also possible that middle-market exchange sales further decline as competitors seek exchanges outside of Liazon. We have our doubts regarding whether the other segments can make up for this lag," Shanker highlighted.

The analyst also warned that larger distribution partners could cease to do business with Liazon, while the wholesale business may feel the pinch due to BB&T's acquisition of Miller peer Swett & Crawford.

Shanker believes organic revenue growth will struggle to exceed the low-single digits in the near-term as well as over the long-term. Shanker said the third quarter has a tough compares versus last year's organic revenue growth of over 8 percent in the legacy Willis Capital, Wholesale, and Reinsurance segment.

Moreover, the analyst highlighted that the second quarter revenue growth faces the headwind of a $40 million one-time gain recorded last year related to a poaching lawsuit against competitor JLT.

"Those revenues will act as a headwind on margin growth in 2Q17, but, more importantly, argues that base revenue numbers in 2016 are overstated by 50bps," Shanker elaborated.

Further, Shanker expects revenue growth in 2017 and 2018 to be strained by departure of talent from Willis Towers Watson largely to competitors over the past two years and BB&T's acquisition of Swett & Crawford.

"The top line also faces a number of headwinds. These businesses thrive on GDP growth, and the current outlook is weak. Compounding this is a flat to negative trend in insurance pricing, which is a drag on commissions," Shanker added.

At time of writing, shares of Willis Towers Watson rose 2.53 percent to $133.07, while Shanker has a target of $122.