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WPP dives on flat sales projection

The advertising group is part-way through a three-year turnaround plan
February 27, 2020

Shares in WPP (WPP) plunged by more than 15 per cent after the advertising giant said that it had endured deteriorating trading conditions in the final quarter of 2019, and that revenues would be flat in 2020.

IC TIP: Hold at 765p

The group has just entered the second year of a three-year turnaround plan, aiming to return to growth by the end of 2021. And after what management called a “foundational” 12 months – which met guidance overall – it reiterated targets of growth in line with peers, with a headline operating margin of at least 15 per cent.

But some will question whether WPP has what it takes to achieve such goals, against an intensely competitive backdrop and amid an industry undergoing major structural change. The group’s guidance also fails to factor in the potential impact of the coronavirus outbreak.

Over the final three months of the year, like-for-like revenues less pass-through costs slipped by 1.9 per cent – having edged up by 0.5 per cent in the third quarter. This contraction came after weakness in various regions, including the UK, Asia-Pacific and Central and Eastern Europe. On the same like-for-like basis, overall revenues declined by 1.6 per cent – landing at £10.8bn. This was worse than consensus estimates of a 1 per cent fall.

Meanwhile, the headline operating margin contracted by 1.2 percentage points to 14.4 per cent – dampened by “challenging performance” in WPP’s specialist agencies, as well as “investing for future growth”. Reported pre-tax profits tumbled by more than a fifth to £982m, after £153m in restructuring and “transformation” costs and £48m in goodwill impairment charges.

As part of its new strategy, WPP has been working to simplify its structure and simultaneously reduce debt. To this end, under the instruction of chief executive Mark Read – who replaced Martin Sorrell in 2018 – the group has offloaded various businesses and investments. In December, it completed the sale of a 60 per cent stake in data analytics firm Kantar to Bain Capital. The £2bn in proceeds from this deal helped to reduce net debt dramatically from £4.3bn to £1.5bn, and to set a £950m share buy-back programme in motion.

The group said that such disposals are now largely behind it, having offloaded 50 businesses or investments in the past year and a half.

Broker Numis expects adjusted EPS of 81.6p for 2020, rising to 87.5p in 2021.

WPP (WPP)    
ORD PRICE:765pMARKET VALUE:£ 9.47bn
TOUCH:765-765.6p12-MONTH HIGH:1,086pLOW: 754p
DIVIDEND YIELD:7.8%PE RATIO:15
NET ASSET VALUE:652p*NET DEBT:45%**
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201512.21.4990.044.7
201614.41.8911056.6
201715.82.1114460.0
201813.01.2675.160.0
201913.20.9850.260.0
% change+1-22-33-
Ex-div:11 Jun   
Payment:06 Jul   

*Includes intangible assets of £11.6bn or 941p a share

**Includes lease liabilities of £2.2bn