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WPP - COVID-19 impact expected to increase

Emilie Stevens, Equity Analyst | 29 April 2020 | A A A
WPP - COVID-19 impact expected to increase

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WPP plc Ordinary 10p

Sell: 966.80 | Buy: 967.00 | Change 4.00 (0.42%)
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WPP's first quarter net revenue (which excludes fees WPP pays to other businesses as part of its projects) of £2.4bn was 3.3% lower than the same period last year. That reflects a good start to the year outside of China but a worsening performance at a group level in March, with net revenues down 7.9%.

WPP expects the impact of COVID-19 to increase in the short term and is still unable to provide any guidance for this financial year.

The shares rose 1.5% on the news.

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Our View

When companies struggle marketing spend is often one of the first things to 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 businesses WPP is at the sharp end of this trend.

Despite a good start to the year (China excluded), performance in March across the group dropped significantly. That doesn't bode well for the second quarter, and beyond that the impact will depend on how big the coronavirus hit to economies is.

It's important to note that after a full year under CEO Mark Read's slimming strategy WPP looks in better shape than it has done for a while. Prior to Read, years of acquisition-led expansion left WPP in a sprawling state. But a significant disposals programme, saying goodbye to 50 businesses and investments and raising £3.2bn, 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 £4.4bn, WPP has an armoury for the crisis. With net debt to cash profits at 0.8 times, WPP entered the crisis comfortably within bank lending requirements of having net debt to headline cash profits below 3.5 times. However, if earnings continue to take a hit like we've seen in March, this could start to look less comfortable.

While WPP entered the coronavirus pandemic fitter, faster was something it was still trying to prove. Revenue growth was both sluggish and somewhat disappointing - particularly in the all-important North American region. If the pandemic sees economies slip into deeper recessions, we expect 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.

WPP expects things will get worse before better and unfortunately we tend to agree. Until the outlook becomes clearer, and we get a better sense of how long current conditions will last, the prognosis for WPP and a marketing spend rebound remain unknown.

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Q1 Trading Update

North America, WPP's biggest region, was the best performing region over the first quarter - net revenues for the quarter were 1.9% lower at £938m. However, as COVID-19 started to have an impact on the business, performance in March deteriorated with net revenues 3.6% lower than last year.

UK net revenues for the quarter were 4.2% lower at £313m, but in light of the UK's lockdown, performance worsened in March with net revenues down 9.8% on last year.

It was a similar story in Western Europe where net revenues fell 3.7% over the quarter to £467m but were down 9.6% in March. WPP says performance varies significantly between countries, with Spain and Denmark trading relatively well but Italy showing a marked deterioration in performance during March.

WPP's Rest of World regions saw net revenue fall 4.6% to £648m, with performance in March worsening and net revenues down 11.5% on the prior year. Asia Pacific was the weakest market sub-region, reflecting the COVID-19 impact on Greater China, but Africa & the Middle East grew strongly and Central & Eastern Europe was also up year-on-year.

Performance varied across WPP's client base. The Automotive, Travel & Leisure and Luxury & Premium sectors, which together account for 24% of WPP's top 200 clients' spend, have seen the most significant cuts. However, spend is holding up relatively well in other sectors including Consumer Packaged Goods, Technology and Healthcare & Pharma which represents 54% of net revenue. WPP confirmed it has not lost any significant client accounts.

As previously reported WPP's immediate cost saving measures are expected to save £700 - 800m this financial year, with a further £100m saved from WPP's capital expenditure plans.

As at 31 March WPP had £1.7bn in cash and total liquidity, including undrawn credit facilities of £4.4bn. Net debt was £2.8bn, down from £4.6bn a year earlier but up £1.3bn from the end of the previous quarter - reflecting seasonal working capital movements and a share buyback programme.

One of WPP's conditions with its lenders is that the Net debt to headline cash profits ratio does not exceed 3.5 times, on 31 December net debt was 0.8 times cash profits.

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