Holding Willis Group Holdings

Willis Group Holdings Limited’s (WSH - Analyst Report) first-quarter adjusted earnings stemmed from stronger than expected revenue growth and lower share count. Though management expects to deliver strong financial performance over the next several years, we suspect the implementation of cost saving initiatives may curtail near-term results.

Organic new business growth remains in the lower-single digits and the 4Q06 10% level appears to have been the peak, as we do not see acceleration given the market softness. As a result of the recently announced acquisition and revised guidance, we are maintaining our FY08 earnings expectation while moderating our FY09 earnings expectation. Hence, we are reiterating our six-month recommendation as a Hold.

Willis Group Holdings shares trade at 11.5x our 2008E EPS and 3.27x its 1Q08 book value of $10.18 per share. Our new six-month target price of $35.50 per share, up from $39.50 per share, incorporates blended forward P/E and price-to-book multiples of 12.2x and 3.3x, respectively, and reflects the company’s higher ROE level. This translates to an 8.1% potential total return (6.5% price appreciation +a 3.1% annualized dividend yield).

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