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WPP - broad based growth gives guidance a boost

Half-year revenue was up 10.2% to £6.8bn.

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Half-year revenue was up 10.2% to £6.8bn. That's 8.7% on a like for like basis, with broad-based growth across Creative, Media and Public Relations businesses.

Underlying operating profit increased 8.2% to £639m. Total operating costs rose 19%, outpacing sales growth, which pulled underlying operating margin down to 11.6% from 12.1%.

Full year guidance has been upgraded and the group now expects underlying operating margin to improve by around 0.5 percentage points, driven by higher sales.

WPP declared an interim dividend of 15p, an increase of 20%. Over the half, £637 million of shares were repurchased under the ongoing £800m share buyback programme.

The shares fell by 5% following the announcement.

View the latest WPP share price and how to deal

Our View

WPP is a media powerhouse. Its scale across advertising and wider marketing agencies cannot be overstated. But sometimes giants get tired, and that's how we viewed WPP. Until recently.

We believe WPP has turned a corner. This has happened faster, and more aggressively than we'd predicted. After a year when above-the-line marketing and advertising spend turned off like a tap, WPP and its huge global agencies have been benefiting from a global glut of corporate wallet-loosening.

Net revenue is pushing ahead nicely, not least thanks to WPP's laser-like focus on boosting its digital marketing offerings. This is where 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. Hundreds of millions 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're genuinely impressed with momentum so far.

To see all business areas ahead of pre-pandemic levels is not only impressive, but a genuine relief. There was a moment when we questioned if WPP would be able to re-ignite its mojo after some lacklustre trading even before the crisis.

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 uncertain global economic backdrop shouldn't be ignored either. WPP's more focussed structure will help it if conditions sour, but it wouldn't be immune to a global downturn, when marketing budgets have typically got slashed.

WPP increased its first half dividend and continues to buyback shares. With this in mind the recent increase in debt is worthy of note, and increases the risk to future distributions to shareholders. Though cash flow over the second half should improve significantly, which will help.

We previously said that long-term prosperity rests on a swift, and accurate, execution of the new strategy. We think WPP is moving at a significant pace, reducing, though not eliminating, that worry. The current price to earnings ratio of 9.2x doesn't appear demanding - but keep in mind the work isn't over yet, so there could be ups and downs. That's especially true in today's uncertain climate.

WPP Key facts

  • Forward (next twelve months) price/earnings ratio: 9.2

  • Ten year average forward price/earnings ratio: 12.2

  • 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 quoted on a like-for-like basis)

The largest geography, North America was the key growth driver with an increase of 10.9% to £2.6bn. Growth was driven predominantly by GroupM, along with strong growth in Hogarth, Superunion and H+K. Underlying operating profit rose from £271m to £300m.

Western Continental Europe revenue grew by 5.3% to £1.4bn, driven by strong performance in Germany and Spain. Underlying operating profit fell from £132m to £99m, as margins fell 0.8 percentage points to 9.1%.

The UK saw modest growth of 3.1% to nearly £956m, AKQA Group, H+K and Landor & Fitch all grew double digits. Underlying operating profit was impacted by a 3.2 percentage point dop in margins, falling from £83m to £67m.

Rest of the world saw growth of 10.7%, bringing in revenue of £1.9bn. Latin America was the strongest region and sustained momentum in India offset a weak China performance, which has been impacted by ongoing lockdowns. Underlying operating profit margin rose to 11.6%, up from 9.7%. That helped profit improve from £132m to £173m.

Free cash outflows widened from £345m to nearly £1.5bn, impacted by a negative move in working capital of £1bn. Underlying net debt nearly doubled to £3.1bn.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 5th August 2022