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WPP - top line trends improving

George Salmon | 9 August 2019 | A A A
WPP - top line trends improving

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WPP plc Ordinary 10p

Sell: 980.20 | Buy: 980.40 | Change -10.00 (-1.01%)
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While underlying net revenue is still down on the prior year, half year results show the rate of decline in North America, WPP's most important geography, has moderated in the most recent quarter.

Full year guidance is unchanged and the half year dividend is held at 22.7p per share.

The shares rose 7.4% on the news.

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Our View

WPP's come a long way since Martin Sorrell picked up a humble wire-basket manufacturer as a holding company for what would become world's largest advertising group. Unfortunately in recent years, the sprawling conglomerate's great weight has created aches and pains to match.

The loss of Martin Sorrell as CEO, after 33 years leading the group, always made some underperformance a possibility.

Mark Read's new strategy calls for an extra focus on helping partners succeed on 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. Selling 60% of Kantar is the main change. The market research division has attracted a sizeable, although not unexpected, price tag of $3.1bn.

The disposals have clear benefits. Years of acquisition-led expansion under Sorrell saw WPP sprawl and a healthy balance sheet was lower down the list of priorities than some investors might have liked. The proceeds will help reduce the debt pile, with leverage of 1.5 to 1.75 times cash profits the medium term goal. It should also help the new management get a grip of the business.

We think Read's turnaround plans make sense, but we also think there are some major challenges around. North American sales have sunk after major clients walked away. While the business has had a better second quarter, the top line remains in decline, and that'll need to change in the future. There's also the fact the group needs to navigate an advertising market that's increasingly dominated by the likes of Facebook and Google.

These headwinds go some way to explaining why the shares trade on just 9.1 times expected earnings, well below a longer term average of 15.3 times.

WPP is expected to hold the dividend in the next few years, and the prospective yield is around 6.5%. That's an attraction, especially since there could be further returns to shareholders following the Kantar sale. However, we'll need to see more signs of progress before we can become confident the group can sustain or grow that payment longer term.

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Half year results (figures at constant exchange rates)

Over the half, reported net revenue was flat at £6.1bn, but fell 2% on a like-for-like basis. That dragged underlying operating profit down 8% to £730m.

North American net revenues were £2.2bn, down 6.9% over the half. While client losses ensured trends in Q2 remained negative (-5.3%) the decline in revenue was not as steep as in Q1. All divisions improved, particularly large integrated agencies and data investment management.

Similarly, trends in the UK improved over the half. Net revenue was £831m, with 1.3% LFL growth in Q2 offsetting the declines in Q1, ensuring performance was flat overall.

Western Europe delivered net revenue of £1.3bn. Trends were stable throughout the half, with LFL net revenue down 0.1% overall. Progress in Belgium, France and Italy and Turkey was countered by weakness in Germany.

Net revenue of £1.9bn in the Emerging Markets division was up 1.7% over the half, with growth slowing in the second quarter as trends in Asia Pacific and China weakened.

Across the group's four segments, global integrated agencies, which includes large businesses like Grey and Ogilvy, outperformed smaller specialist agencies with LFL net revenue up 0.1% as compared to a 5.3% decline. The data investment management business, which is to be scaled back when the 60% sale of Kantar completes, saw LFL net revenue rise 1.2% with PR down 1.1% over the half.

Average net debt was£4.4bn, down £709 million year-on-year, supported by the ongoing disposal programme.

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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.