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WPP - Economic headwinds see global marketing spend slow

Nicholas Hyett | 23 August 2017 | A A A
WPP - Economic headwinds see global marketing spend slow

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WPP plc Ordinary 10p

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First half reported revenue rose 13.3% to £7.4bn. However this was largely supported by currency movements and acquisitions, with like-for-like (LFL) revenue down 0.3% at constant exchange rates (CER).

Headline diluted earnings per share of 45.4p rose 16.1%, up 2.4% at CER. The interim dividend rises 16.1% to 22.7p.

The shares fell 8.4% following the announcement.

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.

However, advertising is a cyclical industry and the underlying performance is not quite as rosy as the top line numbers suggest. Slowing GDP growth is hitting the global consumer goods businesses that form the backbone of WPP's client base and they are trimming budgets to maintain profitability.

Reduced marketing spend has forced WPP to trim guidance for this year. Longer term, however, the group remains confident that it can increase margins to around 20%, and grow earnings per share by around 10-15% per annum.

Over time, WPP has done an excellent job of controlling costs, helping margins expand. While the group has taken on some debts, its solid cash flows have helped it maintain an aggressive acquisition strategy 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 economies, with a target for 40-45% of revenue 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 12.1x, and offer a prospective yield for 2017 of 3.9%.

Half Year Results

WPP saw net sales continue to deteriorate from the first to the second quarter of the year as an ongoing focus on costs among large consumer goods groups, which account for a third of the group's revenue, continued to hit global marketing spend.

The UK, Western Continental Europe and the developing markets businesses all delivered LFL revenue growth over the half as a whole, although Western Continental Europe slipped in the second quarter. However, the large North American business, which accounts for 37.4% of group revenue, saw revenues decline by 3%.

At the divisional level, WPP saw performance weaken across all divisions in the second quarter. Across the half as a whole the small Public Relations and Public Affairs business was the strongest performing unit, with revenues rising 2.4% as a strong performance in the UK offset weakness across other markets.

The key Advertising and Media Investment Management division, which accounts for 47.1% of group revenue delivered revenues in line with the previous year, while Branding and Identity, Healthcare and Specialist Communications saw modest 0.8% growth.

Data and Investment Management continued to struggle after a poor first quarter, dragging the division to a 4.1% decline in the half as performance worsened across all regions except South America.

The continued headwinds have led the group to reduce full year guidance from LFL revenue growth of 2% at the start of the year, to 0-1% at CER. The targeted improvement in headline net sales operating margin remains unchanged at 0.3 percentage points.

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. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.