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WPP - sales growth continues to slow

George Salmon | 27 April 2017 | A A A
WPP - sales growth continues  to slow

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WPP plc Ordinary 10p

Sell: 980.20 | Buy: 980.80 | Change -9.60 (-0.97%)
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WPP's first quarter trading update shows net sales up 4.8% at constant exchange rates (CER) with like-for-like (LFL) net sales up 0.8%. Analysts had expected a figure around 1.1%. The shares dipped 1.5% 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 allowed margins to expand. While the group has taken on some debts, its solid cash flows 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, around 30% of net sales are generated in emerging markets.

Over the last twenty years the WPP dividend has seen compound annual growth in the double-digits. If the global economy behaves itself and the group can deliver on its targets, prospects for future payments ought to be encouraging.

The shares trade on a price to earnings ratio (P/E) of 13.4x, and offer a prospective yield for 2017 of 3.7%.

First quarter trading update (CER)

The UK and Western Continental Europe grew strongly, with LFL net revenue up 3.2% and 5.3% respectively. Developing markets, including those across Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe were more or less flat, while North America was down 3%.

Across WPP's divisions, LFL net sales in the Public Relations and Public Affairs were up 3.9%, driven by a strong European and US led performance from the Cohn & Wolfe and H+K agencies. A good performance in digital marketing and eCommerce helped deliver 2.2% growth in Branding and Identity, Healthcare and Specialist Communications.

LFL net sales in Advertising and Media Investment Management and Data Investment Management dipped slightly, with advertising in more mature markets remaining difficult.

Acquisitions of £704m, dividends of £616m and the £150m of debt taken on from the STW acquisition in Australia more than offset cash generation, meaning net debt at 31 March 2017 was £5bn, compared to £4.5bn a year ago.

WPP's full year target remains to deliver 2% growth in LFL net sales, 0.3 percentage points of margin accretion and complete a share buy-back of 2-3% of the outstanding share capital. £180m of shares, or 0.8% of the issued share capital, was repurchased in the quarter.

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.