WPP grows profits and dismisses ad downturn

Investors have been fretting about an advertising slowdown for some time. However, WPP (WPP) has reassured its shareholders that the industry has “demonstrated great resilience as brands continue to invest in marketing despite turbulence in the global economy”.

Its full-year results attest to this. Revenue is up by 13 per cent at £14.4bn, underpinned by strong organic growth, and operating profit has increased by 11 per cent to £1.36bn. The fact that all three of WPP’s divisions – as opposed to just its tech operations – performed well is also reassuring. Indeed, its core media business managed to grow profits at a faster rate than the flashier specialist agencies. 

After a surprisingly strong 2022, WPP is confident about 2023. GroupM, its media investment arm, expects global advertising spend to grow by 5.9 per cent this year, including a return to growth in China as the economy there reopens, which is expected to grow 6.3 per cent after a decline of 0.6 per cent in 2022. Some areas of digital marketing, such as retail media, look particularly promising.

Shareholders will also be feeling chipper about the 26 per cent dividend hike. However, it’s important to keep an eye on WPP’s indebtedness. Net debt has almost tripled year on year, from £0.9bn to £2.5bn, after £1.1bn of cash was returned to shareholders. As a result, its net debt to Ebitda ratio has jumped from 0.9 to 1.46. Advertising revenues are far from out of the woods yet, and we hope that WPP is not spreading itself too thin. 

After all, growth is expected to slow in 2023. Organic revenue minus pass-through costs is only expected to increase by between 3 and 5 per cent, compared with 7 per cent in 2022. New billings have also fallen from $8.7bn in 2021 to $5.9bn in 2022. Some of our long-held concerns remain unchanged, too: WPP is less exposed to North America than many of its rivals, and its data strategy has yet to prove itself (unlike Publicis (FR:PUB) and IPG (US:IPG), WPP has not boosted its analytical capabilities through a big acquisition).

That said, WPP’s optimism – which is shared by other big industry players – is worth taking seriously. Moreover, the group’s cost-saving plans are running ahead of the original budget of £300mn, and profit margins are widening. Upgrade to hold. 

Last IC View: Sell, 829p, 5 Aug 2022