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WPP - downgrades full-year expectations amid slower tech spend

WPP's net revenue rose 2.0% to £5.8bn on a like-for-like (LFL) basis in the first half.

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WPP's net revenue rose 2.0% to £5.8bn on a like-for-like (LFL) basis in the first half. The second quarter saw China sales accelerate, but more slowly than expected. There was also a decline in US growth as technology spending slowed. Across the group's broader sectors, there were also declines in Automotive, Telecoms and Media, and Retail. Consumer Goods performed strongly.

Underlying operating profit was £666m, compared with £639m a year earlier. There was an underlying free cash outflow of £755m, compared with £1.5bn last year. Underlying net debt rose by around £300m to £3.5bn.

LFL growth for the full year has been downgraded to 1.5 - 3.0%, from 3.0 - 5.0%, reflecting the slowdown in tech spending.

An interim dividend of 15.0p was announced, in-line with last year.

WPP shares fell 7.2% following the announcement.

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Our view

Some wind has been taken out of WPP's sails. WPP is a media business. Its agencies help companies in over 100 countries, across all areas of the marketing spectrum. With over 100,000 employees, it's no small fry. The biggest pillar of the group is its communications businesses. Companies need to promote their brands or products, and that's where WPP comes in. It offers services including analytics, paid advertising campaigns and PR.

This is a very difficult part of the market to operate in when times are tough. And the group's being stung by lower spending in tech and delayed projects. Companies are very much in wait-and-see mode, which means marketing budgets aren't exactly flush. This is a dynamic that's caused WPP to downgrade its targets for the full year, with net revenue growth looking like it could be as low as 1.5%. While this could cause pain in the short to medium term, we're pleased with progress under the hood.

WPP has had a laser-like focus on boosting its digital marketing offerings. The new company plan involves focusing 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.

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.

Looking further ahead it's important not to understate the challenge. There are cracks appearing in some of WPP's larger markets and margins are coming under pressure. In the wider market, growth in online advertising spend is slowing. And with rising competition from more nimble providers a threat that's only likely to grow, there are arguably limits to the market's mood where WPP is concerned.

WPP's shareholder returns increased last year, with management making the most of knocks to the valuation through a share buyback programme. With this in mind, the recent increase in debt is worthy of note, and increases the risk to future distributions to shareholders, particularly if margin growth comes under further pressure.

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 8.1 offers the potential for further upside for investors prepared to take a bit more risk, but the longer-term challenges shouldn't be ignored.

WPP Key facts

  • Forward price/earnings ratio (next 12 months): 8.1

  • Ten year average forward price/earnings ratio: 11.8

  • Prospective dividend yield (next 12 months): 5.1%

  • Average prospective dividend yield: 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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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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 4th August 2023