WPP hails digital shift as it restarts buyback

Advertising giant WPP (WPP) will buy back £300m worth of shares from investors after a “resilient” year which saw net debt (ex lease liabilities) fall to levels not seen since 2004. The FTSE 100 company’s net sales dropped a tenth to £9.8bn for the 12 months ending December 2020, better than analysts’ consensus estimates.

Admittedly, the group posted operating losses of £2.3bn against profits of £1.3bn in 2019, after enduring impairment charges of £3.1bn. These write-downs were linked to historical acquisitions whose carrying values had been reassessed because of the damaging impacts of Covid-19.  

However, the fourth quarter showed a continuing recovery from pandemic-induced declines after clients reduced their spending as the coronavirus crisis took hold, WPP said. Its borrowings sat at £0.7bn on New Year’s Eve – better than expected and down £0.8bn on 2019. This reduction was attributed to strong working capital and cash management.

The group will now resume a previously announced share repurchase scheme, which was suspended last March as the virus spread. The £620m programme was originally designed to return cash to shareholders after the sale of its Kantar data business.

The pandemic has accelerated underlying structural trends in WPP’s markets, driving record levels of growth in online shopping as ‘stay at home’ instructions kept people browsing the web. GroupM, WPP’s media investment wing, estimated that global retail ecommerce rose more than a fifth in 2020, constituting 17 per cent of global retail sales.

Chief executive Mark Read hailed the group’s ability to respond to digital transformation during the health crisis. “At the height of the pandemic we saw five years' worth of innovation in five weeks”, he said, “with a dramatic shift to digital media and ecommerce as people's lives went online – trends on which we based our vision for WPP”.

The company was well-positioned for such a shift, Read said, leading it to see “the benefits of this acceleration in parts of our business”. He flagged new client wins ranging from China’s e-commerce giant Alibaba to ride-hailing platform Uber.

The group believes it can continue to capitalise on the transition to e-commerce. Despite a backdrop of uncertainty, it has maintained its guidance for 2021 of mid-single-digit organic net revenue growth with a headline operating margin of 13.5-14 per cent – a positive sign, although Barclays labelled a greater-than-expected 5 per cent estimated hit from foreign exchange movements “the party downer”.

WPP hopes to return revenues (less pass-through costs) to 2019 levels by 2022 when EPS is expected to hit 80.8p, up from 70.2p in the current year. For now, hold.

Last IC view: Hold, 652p, 27 Aug 2020