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WPP - strong Q1, guidance maintained

Sophie Lund-Yates, Equity Analyst | 28 April 2021 | A A A
WPP - strong Q1, guidance maintained

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WPP plc Ordinary 10p

Sell: 983.80 | Buy: 984.00 | Change -6.40 (-0.65%)
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Net revenue (which excludes fees WPP pays to other businesses as part of projects), rose 3.1% on a like-for-like basis, to £2.3bn in the first quarter. That reflects growth in most regions and all business sectors.

Despite improved trends, the full year outlook is unchanged because of ongoing uncertainty. Like-for-like net revenue is expected to rise by mid-single-digit percentages. Operating margins are predicted to be 13.5-14.0%, and capital expenditure should be £450m - £500m.

The shares rose 3.1% following the announcement.

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Our View

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

But we're seeing green shoots of progress.

Net revenue is back in positive territory and ad spending is dialling back up. We're particularly relieved to see China rebounding so strongly - there was a moment where we were concerned recovery might not happen.

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 for a prolonged period. The Q1 momentum is a good start, but there is a lot more work to be done.

The other bit of good news is that 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. Annual free cash flow around the £1bn mark means it feels confident enough to pay the dividend and restart the previously paused share buyback scheme.

In fact, the pandemic might have helped with the long-term picture. 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.

£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 further tangible results before hailing the strategy shift as a success.

These are necessary efforts because WPP was grappling with changing market dynamics long before Covid. There has long been a shift away from traditional media and into digital alternatives when it comes to marketing spend. 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.

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 changed, 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: 12.9
  • 10 year average Price/Earnings ratio: 12.0
  • Prospective dividend yield (next 12 months): 3.2%

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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First quarter trading details

North America, WPP's biggest region, saw net revenue rise 1.6% to £886m on a like-for-like (LFL) basis, which ignores the effect of acquisitions and disposals. VMLY&R (a business within the Global Integrated Agencies division) was the best business performer, but on a regional basis Canada did well because of new business wins.

The UK saw core businesses rebound strongly, meaning LFL net revenue rose 3.9% £321m. Western Continental Europe net LFL revenue rose 3.7% to £492m, boosted by Italy, Germany, the Netherlands and Denmark, which offset a weaker performance in Spain and France.

Collectively, all other regions (Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe) grew most, with net LFL revenue rising 4.7% to £635m. There was a particularly strong rebound in Chinese revenue (+18.4%) as WPP lapped the weak performance at the onset of the pandemic last year.

On a divisional basis, Global Integrated Agencies (83% of group net revenue), saw LFLs rise 2.8% to £1.9bn - VMLY&R and GroupM did well. Elsewhere, Specialist Agencies and Public Relations improved net revenue by 7.5% and 2.0%.

WPP won $1.3bn of new business in the quarter.

Net debt at 31 March 2021 was £1.4bn, compared to £0.7bn at the end of 2020. That was driven largely by seasonal net working capital movements. WPP spent £83m on share buybacks in the first quarter, of which £65m related to the Kantar share buyback.

The group's also acquired DTI, a digital innovation and software engineering business in Brazil, and NN4M, a "leading mobile commerce partner for global brands". WPP also expects to take 100% ownership of WPP AUNZ in May 2021.

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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.