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WPP - a year ahead of plan

Sophie Lund-Yates, Equity Analyst | 5 August 2021 | A A A
WPP - a year ahead of plan

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WPP plc Ordinary 10p

Sell: 978.40 | Buy: 978.60 | Change -11.60 (-1.17%)
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Net revenue (which excludes fees WPP pays to other businesses as part of projects) rose 11.0% on a like-for-like basis, to £4.9bn. Operating profit, excluding restructuring and Covid-related costs, was 54.5% higher than 2020 at £590m.

WPP said the market recovery has been much faster than expected, and full year guidance has been raised. Net revenue is now expected to rise 9%-10%, up from mid-single digits. The group expects to return to 2019 levels a year ahead of plan. FY2021 operating margins should be at the top end of the 13.5% - 14% guidance range.

Brendan Moorcroft has been confirmed as the new CEO.

An interim dividend of 12.5p was announced, up 25% on last year.

The shares rose 3.0% following the announcement.

View the latest WPP share price and how to deal

Our View

We're seeing a very welcome growth spurt in this media giant. After a year when above-the-line marketing and advertising spending turned off like a tap, WPP and its huge global agencies are moving in the right direction.

Net revenue is firmly back in positive territory and ad spending is dialling back up. We're particularly relieved to see China rebounding so strongly. We're keeping a particular eye on the all-important North America region too. Business here was disappointing pre-Covid but we're pleased with revenue progress. Keeping hold of market share in North America is crucial. Results are being partly flattered by tough comparisons last year, so we'd like a more prolonged period of good news before popping any champagne though.

The other bit of good news is that the balance sheet is in much better health than before the crisis. That provides some level of protection while the group works to turn itself around. WPP 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, because Covid has only accelerated the shift to digital marketing. We are genuinely impressed with momentum so far, for the first time in a long time, we think WPP might be turning a corner.

But before it can reach a home stretch, it's worth remembering that WPP's agency business is still being nibbled away at, and it's turning to acquisitions to keep growth coming. WPP needs to prove that recent momentum can be harnessed and continued. The other sore point, free cash flow, which is expected to fall over 70% this year. That isn't unsustainable if it's a short-lived trend, and analysts expect that to be the case. Nonetheless, it is something to watch as we head into the second half.

There's little to argue with when it comes to WPP's progress. It is impressive. 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. Speed is what concerns us the most - a business of WPP's size won't change its stripes in a hurry.

WPP key facts

  • Price/earnings ratio: 12.2
  • Ten year average Price/earnings ratio: 12.0
  • Prospective dividend yield (next 12 months): 4.4%

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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Half year results (revenue is organic, operating profit is underlying)

North America, the group's biggest region, saw like-for-like (LFL) revenue rise 7.5% to £1.8bn. VMLY&R was "consistently strong", and GroupM and Ogilvy led the recovery in the second quarter, when LFLs were up 13.7% overall. Operating profit rose from £215m to £271m.

Revenues were up almost 32% in the second quarter in the UK, which meant overall LFLs rose 16.9% to £680m for the half. Agencies GroupM and AKQA did particularly well, and operating profits more than doubled to £83m. Germany led a strong performance in Western Continental Europe, where LFL revenue rose 15% to £1.1bn. Operating profit jumped from £44m to £104m, and operating margins more than doubled to 9.9%. France and Spain are yet to return to 2019 levels.

In Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe there was a 10.5% increase in LFL revenue to £1.4bn. Latin America was the best performer, and overall operating profits rose 50% to £132m.

From a business perspective, all divisions grew. The best performer was Specialist Agencies, with LFL revenue rising 17.1% to £401m. The biggest division by far, Global Integrated Agencies, saw LFLs up 10.9% to £4.1bn. Performance was driven by GroupM.

Underlying operating margins improved 3.9 percentage points to 12.1%, as operating costs only rose slightly, with staff costs falling because of lower headcount. Restructuring and transformation costs, as well as the reduction in the value of some assets, meant WPP had exceptional costs of £107m.

The free cash outflow reduced from £825.5m to £345.1m. Net debt as at 30 June 2021 was £1.5bn, down £1.2bn year-on-year.

WPP plans to complete a £350m share buyback programme in the second half.

Find out more about WPP shares including how to invest

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.