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WPP - a difficult year, but some brighter spots

George Salmon | 1 March 2019 | A A A
WPP - a difficult year, but some brighter spots

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WPP plc Ordinary 10p

Sell: 985.60 | Buy: 986.00 | Change -13.80 (-1.38%)
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2018 was a challenging year for WPP with client losses pushing net revenue down 2.6% to £12.8bn. However, a stronger fourth quarter means results are at the upper end of the group's prior guidance, with like-for-like net revenue down 0.4%. Margins were also at the top end of the group's target range.

The shares rose 4.2% on the news.

The final dividend of 37.3p per share, brings the total for 2018 to 60p per share, flat on 2017.

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Our View

The group may be PR masters by trade, but net revenue trends are falling, as major contracts have slipped away, and margins are under pressure. The problems are centred on North America, WPP's highest margin and highest revenue market, where sales continue to sink.

In WPP's defence, advertising is a cyclical beast, and there will always be peaks and troughs. Add in the disruption from losing a CEO that led the group for 33 years, and some underperformance was always a possibility.

However, we can't help but think the current problems are more than just the normal ups and downs.

The industry is becoming ever-more digital, and the rise of the likes of Facebook and Google mean there's a new type of media giant in town. WPP had 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.

With that in mind, it's no surprise the new strategy calls for an increased focus on helping partners succeed in marketplaces such as Amazon and Alibaba. That seems sensible, as do plans to slim down the business by merging and disposing of surplus agencies and interests.

The disposals have clear benefits. Not only will they help reduce the group's substantial debt pile to within the target range, they should help the new management get a grip of the business. Years of acquisition-led expansion under Martin Sorrell saw WPP swell into a sprawling behemoth.

Full year results brought brighter news, with momentum improving in Europe and Emerging Markets. Still, the current challenges are significant, and turning around a supertanker can take time. The US market means revenues and margins look set to fall again next year, which goes some way to explaining why the share trade on just 8 times expected earnings.

The group's targeting holding the dividend steady at 60p, which means the prospective yield is around 7%. That high yield should mean investors are paid to wait and see whether Mark Read & co. can deliver a recovery.

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Trading details (on an underlying basis)

Operating profit fell 24.4% to £1.5bn, but after excluding exceptional costs such as restructuring, currency movement and impairments, was down 7.4% to £2bn. Underlying operating profit margin was 15.3%, down from 16.4%.

Trading remains challenging in the North America, the group's biggest geography, with profits down from £937m to £804m. Net like-for-like revenue fell 4.2% over the year, and was down 4.5% in Q4 as improvements in PR and public affairs was offset by weakness in advertising, data and healthcare.

Trends are also weak in the UK PR and public affairs and direct, interactive and eCommerce businesses, which dragged underlying UK LFL net revenue down 2.7% in Q4, below the 0.5% decline for the year as a whole. Underlying profits fell from £280m to £245m.

However Western Europe delivered its strongest quarter of the year, with LFL net revenue up 4.1%. Underlying LFL revenue trends were also stronger in the Rest of World division, up 2.6% in Q4, marginally ahead of the 2.5% growth over the years as a whole. Still, declining operating margins in both regions saw profits dip 1.1% to £372m and by 7.1% to £626m respectively.

Net cash inflow was £709m, boosted by disposal activity, which outweighed acquisitions by £560m. That meant that, after outflows including dividends and buybacks, the group ended the year with net debt of £4bn, down from £4.5bn in December 2017. The average net debt to EBITDA ratio at 2.1x, is above the revised target range of 1.5-1.75x to be achieved by the end of 2021.

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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.