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WPP - Significant declines drive share price falls

George Salmon | 25 October 2018 | A A A
WPP - Significant declines drive share price falls

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WPP plc Ordinary 10p

Sell: 934.00 | Buy: 934.40 | Change -10.40 (-1.10%)
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WPP has announced disappointing third quarter results, with underlying net revenue falling 0.9% to £3.1bn. WPP had reported growth of 1.4% over the first half.

Guidance for 2018 has therefore been adjusted, with net revenue now expected to fall 0.5-1%, with margins dipping 1-1.5 percentage points.

The shares fell 16.7% on the news.

The new CEO has also set out his rationale for a strategic review of the business, although shareholders will need to wait until December for more details on that.

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Our view

While the group may be PR masters by trade, with net revenue trends falling pretty much across the board, major contracts slipping away and margins coming under pressure, there aren't many positive news stories to spin out of recent results.

The problems are centred on North America, WPP's highest margin and highest revenue market, where sales are continuing to sink.

Advertising is a cyclical beast, and there will always be peaks and troughs, but we worry that current problems are more than just the normal ups and downs.

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. WPP has played down those worries, blaming spending cuts at big consumer goods firms instead, but it's hard to imagine the US tech groups aren't having an effect.

Martin Sorrell's departure means the group is facing these headwinds under new management. Our worry is that a successful stewardship of WPP requires an in-depth knowledge of all the various agencies and divisions, and from that perspective filling Sorrell's boots is going to be a serious challenge.

Perhaps with that in mind, the new man at the helm is trying to slim down the business. This should allow WPP to focus on core strengths, while strengthening the balance sheet, where debt has been creeping up.

We need to wait until December for the full details, but we fancy he won't deviate that much from the Sorrell playbook. A more joined up WPP, with a particular focus on digital media and faster growing economies might well be among his priorities.

That's because cross selling services to global giants is lucrative and makes the most of WPP's scale. Having all marketing activities joined up and under one roof also works for clients, and is beyond the new social media titans.

Still, while WPP has recovery potential, the current challenges are significant. Turning around a supertanker can take time.

The prospective yield of 5.7% (prior to the price fall after Q3s) provides an attraction, but the group has paid out more than target levels in recent times. That, plus the current challenges, mean growth could be thin on the ground in the near future.

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Trading details

The decline in net revenue is driven by a 1.5% fall in like-for-like (LFL) net revenues.

Declines were sharpest in the group's advertising and media investment management division, its largest by net revenue with £1.3bn this quarter. LFL net revenues here dropped 4%, significantly below a 0.8% decline in H1.

LFL trends in Data Investment Management improved slightly to -1.2%. The PR and Public Affairs and Brand Consulting, Health & Wellness and Specialist Communications divisions saw LFL net revenue rise, 2.5% and 0.4% respectively, but both are behind the growth reported in the first half.

It's a similar story geographically, with net revenue trends worsening in all four of the group's main areas. North America, the group's most important market with net revenue of £1.1bn, saw like-for-likes fall 5.3%, accelerating falls of 2.9% from the first half. This was driven by both client losses and spending cuts.

The UK and Western Europe, with combined net revenues of £1bn, reported LFL net revenues of -2% and -0.4%, against growth of 1.5% and 1.9% in the first half.

Business in the rest of the world brought in just shy of £1bn in net revenue. While LFLs were positive, up 2.4%, growth was behind the 2.6% seen over H1 as weakness in Australia and New Zealand weighed on strong progress in many Emerging Markets.

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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.

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