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WPP - Strong results but a weaker outlook hits shares

George Salmon | 3 March 2017 | A A A
WPP - Strong results but a weaker outlook hits shares

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WPP plc Ordinary 10p

Sell: 983.60 | Buy: 983.80 | Change -6.60 (-0.67%)
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WPP has reported strong results for 2016, with like-for-like net sales growth in every geographic and business region. However, Q4 was the weakest of the year, although against tougher comparatives, and the group has reported a slowing of growth in the early stages 2017. The shares fell 5.5% 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 has boosted reported revenues as a result of sterling weakness.

Advertising is a cyclical industry, and the group's outlook for 2017 is more conservative. Not particularly welcome guidance, but by no means a disaster. The group is still confident of growing ahead of the market. Longer term targets of increasing margins to 20%, and growing earnings per share by around 10-15% per annum are unchanged too.

Over time, the group has done an excellent job of controlling costs, which has given it strong cash flows and allowed margins to expand. While the group has taken on some debts, its solid cash flow has helped it acquire other businesses without increasing leverage significantly. Acquisitions remain a key part of the strategy.

In recent years, deal-making has 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 30.5% of net sales are generated in emerging markets.

Over the last twenty years WPP has grown the dividend at a double-digit compound annual growth rate. If the global economy behaves itself and the group can deliver on its targets, prospects for future dividends ought to be encouraging.

The shares trade on a price to earnings ratio (P/E) of 14.6x, which is above the long run average of c.12.6x. The prospective yield for 2017 is 3.3%.

2016 results:

2016 net sales are up 7.4% at constant exchange rates, boosted by acquisitions and like-for-like (LFL) net sales growth of 3.1%. On a LFL basis, net sales margin increased 0.3 percentage points to 17.4%, in line with group's targets.

At CER, profit before interest and tax rose 8.5% to £2.2bn. The full year dividend rises 26.7% to 56.60p, reaching the recently targeted pay-out ratio of 50% one year ahead of schedule.

Average net debt over 2016 was £4.3bn, an increase of £778m, impacted by the group's non-sterling debts. The average net debt to EBITDA ratio remains under 1.8x, in the middle of the target range.

Given the group's forecast for continued tepid economic growth and recent weaker net new business trends, WPP has given conservative guidance LFL net sales guidance of around +2% for 2017. However, it will again target improving operating margin on net sales by 0.3 margin points on a LFL basis.

The group's largest division, Advertising and Media Investment Management, had a strong year. LFL net sales growth of 3.7% helped overall net sales grow to 6.5%. However, while sales trends improved in Asia Pacific in Q4, growth was weaker everywhere else, including the US. The trend for a weaker Q4 was consistent with that seen in the Public Relations and Public Affairs division.

The Branding and Identity, Healthcare and Specialist Communications business was more resilient in Q4 and reported LFL net sales growth of 3.5% over the year. Data Investment Management saw LFL net sales growth of 0.9%, with growth held back by challenging conditions in custom research, where customers are reviewing spending.

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.