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WPP - still in transition and a disappointing end to the year

Emilie Stevens, Equity Analyst | 27 February 2020 | A A A
WPP - still in transition and a disappointing end to the year

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WPP plc Ordinary 10p

Sell: 980.00 | Buy: 980.20 | Change -10.20 (-1.03%)
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Net revenue from continuing operations finished the year 1.5% lower at £10.8bn and was 1.6% lower on a like-for-like basis. Despite seeing improvements in the second half of the year, the declines reflect a disappointing fourth quarter and continued challenge in the North American business. Operating profits from continuing operations fell 5.6% to £1.6bn.

WPP held the final and full year dividend flat, at 37.3p and 60p respectively.

Guidance of the coming year was lower than the market had hoped, with revenues and margins flat year-on-year before allowing for any coronavirus related issues.

The shares fell 15% in early trading.

View the latest WPP share price and how to deal

Our View

After a full year under CEO Mark Read WPP looks notably different. Leaner - yes. Balance sheet healthier - yes. But, faster? Not so much. Revenue remains sluggish.

The slimming strategy comes after years of acquisition-led expansion, and the disposal of surplus agencies and interests is distinctly Read. Over 50 have gone in the last 18 months but the sale of 60% of Kantar is the big one. The market research division attracted a sizeable £2.4bn price tag. A big chunk of that has been returned to shareholders but most has helped WPP reduce its £4bn+ debt pile down to just £1.5bn.

When it comes to growth the focus is on using data and technology to help clients succeed in online marketplaces like Amazon and Alibaba. Data scientists are increasingly as much a part of the team as creatives. More than half of global media spend is in new channels and the way we consume content has changed dramatically - so WPP's approach of pairing the old with the new seems logical.

While we think Read's turnaround plans makes sense, there are some major challenges. WPP is struggling to grow revenues and organic growth isn't expected until at least 2021.

It's a relief to see revenue declines in North America have slowed, but the division continues to struggle. WPP has been looking to developing markets like Latin America and China to make up the shortfall and early signs were positive. The long term impact of coronavirus remains to be seen though and numbers were already starting to wobble at the end of last year.

The shares trade on 9.8 times expected earnings, well below a longer term average of 12.3 times. That reflects the fact that while the turnaround is very much in motion, a recovery in revenues certainly looks further off than the market and we had hoped.

Still, at least investors should be paid to wait. The dividend, which currently represents a prospective yield of 6.6%, is comfortably covered by earnings and strong cash generation. However, investing in recovery scenarios is inherently higher risk and investors should never rule out the possibility that management need to call on the cash currently earmarked for investors for more pressing issues.

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Full Year Results (figures at constant exchange rates and underlying basis)

Trading in North America, the group's biggest geography, remains a challenge for WPP. Operating profits fell to £662m, down from £711m. Net like-for-like revenue fell 5.7% over the year, and was down 4.5% in Q4. Overall declines reflect weakness in PR and specialist agencies, despite an improvement in the second half of the year thanks to the the impact of prior year client losses starting to ease .

Operating profits in the UK rose 4% to £188m, with net like-for-like revenue up 0.3% for the year. However, performance deteriorated in Q4 with net like-for-like revenue down 3.7% - reflecting weakness in global integrated agencies and particularly GroupM, partly offset by improvements in PR.

Western Continental Europe net like-for-like revenues rose 0.7% over the year but performance declined in Q4, reflecting weakness in France, Italy, the Netherlands and Switzerland. Operating profits fell 9.3% in the year to £262m.

Rest of World, WPP's second largest division, was the strongest performing region over the year with net like-for-like revenues growing 1.4%. However, performance in Q4 dropped off with net like-for-like revenues falling by 0.2% compared to a rise of 4% the prior quarter. Operating profits for the year fell 5% to £449m.

In December WPP completed the sale of its stake in Kantar, amounting to around £2.4bn. The proceeds will be used to reduce debt and £950m will be returned to shareholders through a buyback - £247m has been completed so far.

Free cash flow generated during the year was a little over £1bn. Net debt finished the year at just over £1.5bn, down from £4.3bn last year, the improvement largely reflecting proceeds from the Kantar sale.

WPP is targeting organic growth in line with peers in 2021 and an operating margin of at least 15% - up from this year's 14.4%.

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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.