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WPP - A weak end to the year, future guidance lowered

George Salmon | 1 March 2018 | A A A
WPP - A weak end to the year, future guidance lowered

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

WPP plc Ordinary 10p

Sell: 985.60 | Buy: 986.00 | Change -13.80 (-1.38%)
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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 shares fell 8.5% on the news.

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

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Our View

WPP is the world's largest media agency, with around 200,000 employees spanning everything from creative campaigns to media buying and market research.

Over the last twenty years WPP's dividend has seen compound annual growth in the double-digits, driven by organic sales growth and numerous bolt-on acquisitions. However, growth has been slower recently, and full year results came in well below what was expected a year or so ago

Advertising is a cyclical industry, so on the face of it, this isn't too much of a concern. However, some have worries extending beyond where we are in the cycle.

Advertising is becoming a more digital industry, and there are concerns Facebook and Google could disintermediate some of the services WPP provides. CEO Martin Sorrell has played down those suggestions, sticking with the explanation that weaker spending by big consumer goods clients is the cause.

Given Sorrell's experience and track record, it seems reasonable to give him the benefit of the doubt for now. However, the decision to downgrade long-term earnings growth forecasts is notable.

Looking forward, WPP will be simplifying its structure. The aim is to increase co-operation between the various divisions, ultimately enabling it to offer a more joined-up set of services to its biggest clients.

It'll also be pivoting towards digital media and faster growing economies. The group's target is for 40-45% of revenue to be earned from each category within the next three to four years. At the moment, around 30% of net sales are generated in emerging markets, with 'new media' around 40%. This strategy make sense to us, after all it's an industry where you can't afford to stand still.

Recent weakness means before full year numbers the shares traded on 11.2 times expected earnings, almost 10% below their historic average. The prospective yield for 2018 is 4.5%.

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Trading details

The UK was the only region to deliver positive LFL growth over the year, 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, the Advertising and Media Investment Management> business, 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.

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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. 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.