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WPP - CEO departs after 33 years

George Salmon | 16 April 2018 | A A A
WPP - CEO departs after 33 years

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WPP plc Ordinary 10p

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WPP has announced that long-serving CEO Sir Martin Sorrell is stepping down with immediate effect.

The shares fell 3.5% on the news.

Sorrell had been accused of personal misconduct, but WPP says an investigation into these claims did not reveal anything material.

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Our View

The tale of how Martin Sorrell transformed shopping basket manufacturer Wire & Plastic Products into a FTSE 100 advertising giant is a remarkable one.

30-plus years of deal-making saw names such as Ogilvy and J Walter Thompson added to the portfolio, and WPP now has around 200,000 employees in businesses spanning everything from creative campaigns to media buying and market research. Finding a new CEO who can understand and unite such a diverse conglomerate from the word go may not be easy.

The challenge comes at a difficult time too. Progress in March's full year results was well below what investors have been used to.

Advertising is a cyclical beast, but some have worries extending beyond where we are in the cycle. The industry is becoming ever-more digital, and by allowing the customer to go direct, companies like Facebook and Google could disintermediate some of the services WPP provides. The group has played down these worries, and has instead drawn attention to the spending cuts at big consumer goods firms.

However, the decision to downgrade long-term earnings growth forecasts is notable, and goes against the grain. Over the last 20 years WPP has consistently delivered strong results, helping it build one of the best dividend records in the FTSE 100. Bloomberg consensus is for the stock to yield around 5.1% in 2018.

While its certainly no bad thing to have a record like that to lean on, it's the future, not the past that matters for investors.

WPP has previously said it'll simplify its structure to increase co-operation between the various divisions, and continue to focus on digital media and faster growing economies. Both seem sensible strategies.

However, with debts at the top end of the target range, organic growth flagging and now uncertainty around the leadership, it's easy to see why the shares trade on 10 times expected earnings, a near 20% discount to their long-term average.

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2017 results (1 March 2018)

WPP reported revenue growth of 6.1% in 2017, with operating profits rising 4.9% to £2.3bn. However, both were boosted by favourable currency movements and acquisitions.

On a like-for-like basis, which excludes these factors, net sales fell 1.3% in Q4, giving a movement for the year of -0.9%. The group also downgraded its long-term guidance on future earnings growth, from a range of 10-15% per annum to 5-10%.

The UK was the only region to deliver positive LFL growth, up 4.8%. Western Europe delivered a flat LFL performance, while the group's two biggest regions, Emerging Markets and North America, saw declines of 0.8% and 3.2% respectively.

WPP's largest division, Advertising and Media Investment Management, saw LFL net sales drop 2.3%. However, including acquisitions and favourable currency movements, net sales rose 8.1% to £5.9bn with a steady operating margin of 19% giving operating profits of £1.1bn.

In Data Investment Management, The Americas and Asia Pacific were difficult markets, leading LFL net sales down 1.3% over the year. Currency movements and acquisitions ensured operating profits remains flat at £350m.

The Brand Consulting, Health & Wellness and Specialist Communications and Public Relations and Public Affairs divisions both saw net sales rise marginally. While margins in both divisions dipped, each delivered slightly higher operating profits, of £625m and £183m respectively.

Average net debt rose £803m to £5.1bn, reflecting the £229m net acquisition spend, and dividends and share repurchases of £1.5bn.

The group expects LFL net sales and margins to be flat over 2018.

The final ordinary dividend rose 0.7% to 37.3p per share, taking the full year dividend to 60p.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance.

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