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WPP - Momentum continues

George Salmon | 31 October 2016 | A A A
WPP - Momentum continues

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WPP plc Ordinary 10p

Sell: 980.60 | Buy: 980.80 | Change -9.60 (-0.97%)
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Momentum continues

WPP's net sales for the third quarter are up 23.6% to £3.1bn, with sterling's weakness providing a significant boost. At constant currency rates, Q3 net sales were up in quarter 3 in all regions and business sectors. The shares rose by over 3.5% on the news.

Our View

WPP is the largest media agency in the world, with around 200,000 employees in a group of businesses spanning everything from creative campaigns to media buying and market research. That global reach of the business has boosted reported revenues as a result of sterling weakness.

The company has done an excellent job of controlling costs, which has seen margins progressively expand over recent years. This has translated into very strong cash flows, enabling organic growth to be supplemented by acquisitions. In recent years, deal-making has been focused on raising exposure to digital media and faster growing nations, with a target for 40-45% of sales to be earned from each of these categories within five years. At the moment, just under 30% of revenue is generated in emerging markets.

Over the last twenty years WPP has grown the dividend at a double-digit compound annual growth rate. Should the group be able to meet its target of earnings per share growth of 10% to 15% per annum, prospects for future dividends ought to be encouraging.

Advertising is a cyclical industry but at the moment conditions in most of WPP's markets are good. As long as the global economy behaves itself, WPP should be capable of strong growth. The shares trade on a price to earnings ratio (P/E) of 14x, which is above the long run average of c.12.6x. The prospective yield for 2017 is 3.6%, with analysts expecting more dividend increases in the coming years.

Third Quarter trading in detail (at constant currency rates):

Group net sales growth was 7.8%, with 2.8% from improving like-for-like (LFL) sales and 5% from acquisitions. A further 10 acquisitions were completed in the quarter, bringing the total for the year to date to 46.

In the first nine months, net sales operating margins were up 0.3 percentage points, in line with the Group's full year margin target.

LFL net sales in the group's largest division, Advertising and media investment management (AMIM) grew by 3.5% in Q3. A strong quarter in media investment management was partly offset by slowing activity in the UK, Africa and the Middle East.

LFL net sales were up by 2.6% in WPP's Branding & Identity, Healthcare and Specialist Communications businesses and by 5.1% in PR and Public Affairs after a strong quarter here. However, LFL net sales in Data Investment Management were flat as demand for third party data wanes.

Net debt at 30 September 2016 was £4.7bn, compared to £4.6bn in 2015 (at 2016 exchange rates), an increase of £74m.

The group's targets for the year remain for net sales growth of over 3%, and a 0.3ppt operating margin improvement on a constant currency basis. WPP's longer-term target is for earnings per share growth of 10% to 15% p.a. delivered through greater than industry average revenue and net sales growth, margin expansion, acquisitions and share buy-backs.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.