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WPP - Strategy review following Sorrell departure

George Salmon | 30 April 2018 | A A A
WPP - Strategy review following Sorrell departure

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WPP plc Ordinary 10p

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WPP's preferred measure of underlying sales, revenue less pass-through costs, fell 5.1% to £2.9bn in the first quarter. However, excluding currency headwinds, it was up 1%. That's slightly ahead of market expectations.

Following Martin Sorrell's departure, Joint-COO's Mark Read and Andrew Scott are leading the business and are undertaking a strategy review.

Targets for the current financial year remain unchanged.

The shares rose 7.1% in early trading.

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Our View

The first set of results following Martin Sorrell's departure from the advertising giant he created are slightly better than analysts had feared.

That'll be a relief for shareholders, since results have been sluggish of late, with organic revenue growth particularly disappointing. Advertising is a cyclical beast, and therefore has peaks and troughs, but some have worries extending beyond where we are in the cycle.

The industry is becoming ever-more digital, and by allowing companies to go direct to customers, companies like Facebook and Google could cut WPP out of the loop. The group has played down these worries, and blaming spending cuts at big consumer goods firms instead.

Still it's perhaps no surprise the two men who've inherited the world's largest advertising business are looking closely at the group strategy.

So far the only diversion from the Sorrell playbook is a slight tightening of debt targets, after debt climbed by around 60% in five years. However, there are rumours of bigger changes afoot.

WPP is said to be considering a sale or merger of market research arm Kantar. Meanwhile the plan to reduce debt could mean the steady flow of acquisitions and share buybacks slows.

Under Sorrell, WPP said it would simplify its structure to increase co-operation between the various divisions, and continue to focus on digital media and faster growing economies. Both seem sensible, and we'd expect them feature in any new strategy.

For those prepared to wait and see what messrs Read and Scott come up with, the shares offer a prospective yield of 5.2%.

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Trading details - at constant exchange rates

Revenue less pass-through costs grew by between 2.1% and 2.7% in all markets other than North America. The 1.7% decline in North American sales reflects poor performances in advertising, data investment management and healthcare.

Data investment management and advertising saw similar pressures around the world, particularly difficult conditions in developed markets. By comparison, brand consulting, health & wellness and specialist communications performed strongly, with sales up 7.8%.

Net debt increased by £357m in the quarter to £5.2bn. Net debt has risen towards the top end of WPP's 1.5-2x EBITDA (earnings before interest, tax depreciation and amortisation) target recently, and given tougher market conditions, the group has decided to tighten its target range to 1.5-1.75x. The reduction is expected to be achieved over the next 12-18 months.

WPP completed the repurchase of 11.5m shares, or 0.9% of the issued share capital, for £145m.

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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.