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WPP - COVID-19 update, shareholder returns suspended

Emilie Stevens, Equity Analyst | 31 March 2020 | A A A
WPP - COVID-19 update, shareholder returns suspended

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WPP plc Ordinary 10p

Sell: 980.80 | Buy: 981.00 | Change -9.40 (-0.95%)
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WPP had an encouraging start to 2020, but has reported a weaker performance in March because of COVID-19 and government restrictions. The group expects the impact of coronavirus will increase in the second quarter.

WPP said it can't quantify the "depth or duration" of the disruption and has withdrawn its full year guidance.

The group has taken a number of immediate cash saving measures. These include suspending the £950m buyback programme and 2019 final year dividend of 37.3p per share - saving around £1.1bn of cash. The final year dividend will remain under review.

The shares were up 7.5% in early trading.

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Our View

When companies struggle marketing spend is often one of the first things go in a bid to preserve cash. With businesses facing serious disruption or even zero revenue situations, preserving cash is paramount in this pandemic. As one of the world's largest marketing business WPP is set to be at the sharp end of this trend.

It's worth noting that after a full year under CEO Mark Read's slimming strategy WPP looks in better shape than it had done for a while. Prior to Read, years of acquisition-led expansion left WPP in a sprawling state. But a significant disposals programme, raising £3.2bn in the last 18 months, leaves WPP leaner and with a healthier balance sheet.

While we're comforted by a healthier financial position. If disruption is prolonged, even the best balance sheets will come under strain - cash flows and the ability to service interest payments on debt, could be called into question.

The uncertainty means it's no surprise WPP is focussed on preserving cash at the moment. The group's immediate measures are significant. And together with access to cash and bank credit of £4.8bn - add to WPP's armoury for the crisis. With net debt to cash profits at 0.8 times, WPP starts the battle comfortably within bank lending requirements, of having net debt to headline cash profits below 3.5 times.

While WPP entered the coronavirus pandemic fitter, faster was something it was still trying to prove. Revenue growth was both sluggish and disappointing. While today's results show there was a marked improvement in the all-important North American region, two months' worth of change is not much to go on. As the pandemic takes hold globally and the question for economic recessions become 'how long' not 'if' - WPP's quest for pace will be knocked back to say the least.

Over the longer term, WPP's strategy of focussing on using data and technology to help clients succeed in online still makes sense. More than half of global media spend is in new channels and the way we consume content has changed dramatically.

Unfortunately, progress will likely be on hold until the world is past the pandemic. And with many countries just starting lockdown - WPP's quite right in saying the depth and duration of the problems are still very much unknown. The longer the duration, the bigger the impact. Until the outlook becomes clearer, the prognosis for WPP and a marketing spend rebound are still unknown.

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Coronavirus Trading Update

For the first two months of 2020, like-for-like net revenue fell 0.6%, in line with previous guidance. Excluding Greater China, which saw a 16.1% drop, this was up 0.4%. In the USA the rate of decline in like-for-like net revenue slowed to 0.9%, compared to a decline of 4.4% in the second half of 2019.

In China, WPP said there was a significant slowdown in economic activity and closure of offices. At the peak of the crisis, most members of staff in China were working from home, and as restrictions are lifting just over half of the workforce is back in the office.

During this period, WPP new clients wins included Intel, Hasbro and Discover, and retentions included BBVA.

Over March, WPP has seen a range of responses to coronavirus from clients. In the short term, WPP said there has been little change to media spending, but there has been a rise in cancellations. Project and retainer client work has continued in most sectors, but activity has also started to decline.

WPP is continuing to pitch for new business, where the process was already underway, but is less certain over future pipeline. In some markets WPP reports there's been additional demand for PR and specialist communications businesses.

WPP said most of its costs are variable and has commenced a review of costs to protect profitability. Immediate cost saving measures are expected to save £700 - 800m this financial year. These include: freezing new hires, reviewing freelance expenditure, stopping discretionary costs - including travel and award shows, and postponing planned salary increases for 2020. WPP's executive committee and board will take a 20% reduction in salaries for an initial period of 3 months. A further £100m will be saved from WPP's capital expenditure plans too.

As at 31 December 2019 WPP had £3.0bn in cash and total liquidity, including undrawn credit facilities of £4.8bn. Net debt was £1.5bn, down from £4.0bn a year earlier. Net debt to headline cash profits ratio was 0.8 times. One of WPP's conditions with its lenders is that the Net debt to headline cash profits ratio does not exceed 3.5 times.

WPP will provide a first quarter trading update on 29 April 2020.

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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.