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WPP - reports full year operating loss

Sophie Lund-Yates, Equity Analyst | 11 March 2021 | A A A
WPP - reports full year operating loss

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WPP plc Ordinary 10p

Sell: 984.20 | Buy: 984.60 | Change -5.60 (-0.57%)
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Underlying revenue fell 8.2% to £9.8bn, ignoring the effect of exchange rates. There's been a gradual recovery since initial lockdowns, and sales were down 6.5% in the final quarter. The declines reflect reduced advertising spending in Europe and the US.

Lower revenue and a £3.1bn write down in the value of some assets, meant WPP made a reported operating loss of £2.3bn, compared to profit of £1.3bn last year.

The group announced a final dividend of 14p per share, and is recommencing the share buyback scheme.

The shares rose 1.3% in early trading.

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Our View

Covid hasn't been kind to the world's largest marketing business. In times of economic crisis, marketing budgets get slashed, and that's made for a painful decline in WPP's revenues - across all its extensive geographies last year.

But a painful shift in the economic cycle has simply covered up pre-existing structural challenges.

There has long been a shift away from traditional media when it comes to marketing spending. That hasn't changed, and has in fact likely been accelerated by the pandemic. WPP's agency business is being nibbled away at, and it's turning to acquisitions to keep growth coming.

We're keeping a particular eye on the all-important North America region. Business here was disappointing pre-Covid and, as the world reopens, we'll find out whether the group's capable of recapturing market share. The continued revenue declines in China, despite increased advertising spend in the region, make us slightly sceptical of WPP's pulling power.

WPP recognises there's much work to be done if it wants to keep up. Somewhat counterintuitively, this is where the pandemic might actually have helped.

It forced the group to step up streamlining efforts and refocus itself. The new plan involves focussing on faster growing end markets (like how to help clients succeed online) and technology. The group is trying to harness momentum, and a focus on digital has already helped put a bit of a spark back in new business wins.

£600m will be spent over the next few years, most of which will go on new staff, technology and incentives. It all sounds like the right plan, but we'll wait to see some tangible results before hailing the strategy shift as a success.

The balance sheet is in much better health than before the crisis. That provides a level of protection while the group works to turn itself around. And free cash flow around the £1bn mark means it feels confident enough to pay the dividend and restart the previously paused share buyback scheme. Remember, no dividend is guaranteed.

WPP is in a state of flux. It's enormous scale houses some genuinely impressive businesses, and we can't knock the work being done. But we can't shake the thought that its end markets have shrunk, potentially forever. We don't have concerns about WPP's survival, but long-term prosperity rests on a swift, and accurate, execution of the new strategy.

WPP key facts

  • Price/Earnings ratio: 12.3
  • 10 year average Price/Earnings ratio: 12.0
  • Prospective dividend yield (next 12 months): 3.4%

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

Revenue in North America, the group's biggest geography, fell 5.8% to £3.7bn. That reflects a 7.3% fall in non-political advertising spending in the US, although the region did better than expected in the second half because of increased e-commerce activity. Operating profit fell 7.6% to £612m.

Operating profits in the UK were £138m, down from £189m. Again, this region beat expectations in the second half because of increased online marketing spending. Overall, revenue fell 10.5% to £1.2bn though, as lockdown limited recovery in larger integrated agencies.

Western Continental Europe saw revenue fall 8.1% to £2.0bn. There's been a stronger recovery in Germany, the Netherlands, Denmark and Sweden compared to Spain, Italy and France. Operating profit declined 23.8% to £199m.

Advertising spending in China has recovered quite well, but this wasn't enough to offset overall revenue declines in other regions. Revenue for the group's other geographies fell 10.3% to £2.8bn, and operating profit was £312m (2019: £449m).

Performance was worst affected by automotive, luxury and premium, and travel and leisure businesses. Combined, revenue fell 9.8% for these sectors. Consumer packaged goods, technology and pharmaceuticals businesses "held up reasonably well", but these still grew sales by less than 1%.

WPP incurred restructuring and transformation costs of £313m. This includes redundancies, property restructuring and Covid-related spending.

The group reduced operating expenses by 8.4% in 2020. Free cash flow was £1.3bn, compared to £1.0bn last year and net debt more than halved to £700m, reflecting improved efficiency and lower dividend payments.

WPP is targeting annual gross cost savings of £600m by 2025. Two thirds of these savings will be reinvested in new hires, technology and incentives.

The outlook for 2021 is unchanged, the group expects mid-single digit percentage growth in organic revenue, and capital expenditure of £450m - £500m. WPP intends to repurchase up to £300m of its own shares by June 2021 as part of the share buyback programme.

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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.