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WPP - net revenue better than planned but still down

Sophie Lund-Yates, Equity Analyst | 29 October 2020 | A A A
WPP - net revenue better than planned but still down

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WPP plc Ordinary 10p

Sell: 821.60 | Buy: 822.20 | Change 2.80 (0.34%)
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WPP's third quarter net revenue (which excludes fees WPP pays to other businesses as part of projects) fell 7.6% to £2.4bn. That reflects double digit declines in China and India, with less significant falls elsewhere.

Customer activity and internal cost management has been better than expected. WPP is on track to achieve full year cost savings at the high end of its £700m - £800m guidance range and expects net revenue growth to fall between analyst expectations of -8.5% to -10.7%.

The shares fell 3.5% following the announcement.

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Our View

New business wins and a steadier stream of customer spending, coupled with the lifting of total lockdown in the UK, means net revenues are looking brighter than last quarter.

The market was clearly expecting bigger strides to be made, but this is at least a small step in the right direction. Economically, we're not out of the woods, and the threat of further lockdowns builds by the day as infection rates pick up pace. Torrid economic conditions usually mean businesses ratchet down marketing spending - it's easily flexed compared to the other bills that need paying. As the world's biggest marketing business, WPP is at the sharp end of this trend.

Because of that, trading is still volatile - and the pace of recovery will largely depend on how the pandemic progresses.

It's important to note that after a full year under CEO Mark Read's slimming strategy WPP entered the crisis in better shape than it had been for a while. A more streamlined structure and healthier balance sheet provided an important source of resilience. Debt is still higher than we'd like but not yet unmanageable, especially given WPP's substantial liquidity. This is something we'll be keeping a close eye on, as if disruption is prolonged even the best balance sheets will come under strain.

While WPP entered the coronavirus pandemic fitter, revenue growth was both sluggish and somewhat disappointing before the crisis- particularly in the all-important North American region. That's reversed over the crisis, with North America weathering the storm the best. But as the real impact of the crisis on economies becomes clearer, it looks like growth may take a backseat for a while.

Over the longer term, the group's focus on using data and technology to help clients succeed in online makes sense. More than half of global media spend is in new channels and the way we consume content has changed dramatically. An industry leading first half for new business, suggests WPP's new offering is working, but it'll need a few more of those to prove its success.

Unsurprisingly the pandemic hit marketing budgets and WPP rather hard, and with economic recoveries fragile, we expect growth to be slow over the near to medium term. That being said we're encouraged to hear of new business wins and if that reflects a better client offering, digital in particular, WPP should be well placed to benefit - but only when marketing budgets return.

WPP key facts

  • Price/Earnings ratio: 9.0
  • 10 year average Price/Earnings ratio: 13.8
  • Prospective dividend yield (next 12 months): 6.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details

North America, WPP's biggest region, saw net revenue fall 5.1% to £922m, compared to a 10.2% fall last quarter. The partial recovery was driven by steady improvement in the US and "very strong" recovery in Canada.

The lifting of lockdowns in the UK meant net revenue fell 6.5%, compared to 23.3% last quarter. Creative agencies are recovering more slowly than GroupM (WPP's advertising data & technology, investment and services business). Western Europe was buoyed by Germany where net revenue was almost flat. Overall the region fell 5.5%, despite improvements in France, Italy, Spain and Denmark.

All other regions (Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe) improved their performance, but are recovering more slowly than other regions. Net revenue in these regions fell 12.5% this quarter, and 14.8% in Q2.

On a divisional basis, Global Integrated Agencies (75.2% of net revenue) fell 6.7%. VMLY&R (a global full service marketing agency) was the strongest performer, while GroupM was recovered steadily as customer media spending picked up. Elsewhere, Specialist Agencies and Public Relations saw net revenue dip 13.9% and 2.9%.

The sale of Kantar helped average net debt fall by £2bn in the first nine months of the year, to £2.5bn (£2.3bn at the end of September).

WPP said: "Given the tightening of COVID restrictions around the world and uncertainty in the global economic outlook, we remain cautious about the pace of recovery."

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.