WPP beats forecasts as whips self into shape

Convalescent media colossus WPP saw revenues slip less than feared last year but said 2019 will be challenging after a spate of client losses.

Revenue of £15.6bn for 2018 was down 2.6% year-on-year or 0.4% lower on a like-for-like basis, with a 0.1% decline in the fourth quarter. Analysts had on average expected a decline of 0.6% for the year and 1.5% for the fourth quarter.

North America, the group’s largest market at 34% of the total, saw revenue down 3%, while the UK, Western Europe and Rest of the World were up 1.5%, 1.7% and 3.8% on a LFL basis respectively.

Headline diluted earnings per share were down 10.3% to 108.0p and, with net debt position improved by £466m to £4bn, the total dividend was held at 60p.

Statutory profit before tax shrank 30.6% to £1.5bn and EPS were down 40.8% to 84.3p.

Chief executive Mark Read, who took over after longtime boss Sir Martin Sorrell left under a cloud last summer, said the company has made good progress since September in implementing its new strategy, including slimming down the group with 36 disposals since last April, raising £849m of cash proceeds.

“We have set out our vision for a more client-centric WPP, simplified our offer through the creation of two new integrated networks, VMLY&R and Wunderman Thompson, realigned our US healthcare agencies with major networks, formed the company's first executive committee and begun the process of seeking a financial and strategic partner for Kantar.”

He said the business is performing strongly in Western Europe, Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, and “we are addressing our performance in the United States”, where there ha been “important wins” such as Volkswagen and “significant investments” were being made in talent in what is the group’s largest market.

After client losses last year included Ford, American Express, HSBC and PepsiCo, Read said there had been some “early signs of success in attracting new business and new talent”, with VMLY&R client wins totalling $25m in its first 90 days.

But, as he said at the strategic update in December, the client losses will make 2019 challenging, particularly in the first half.

For the current year the targets have been set for LFL revenue less pass-through costs to fall 1.5-2.0%, with stronger headwinds in the first half.

Headline operating margins are seen falling around 1.0 percentage point on a constant currency basis.

"We are at the beginning of a three-year turnaround plan, but WPP's new positioning as a creative transformation company with stronger, more integrated, more tech-enabled agencies is already proving effective, having driven several of our recent new business successes,” said Read. “As we implement our strategy in 2019 we will continue to put creativity, technology and great work for clients at the heart of our own transformation."

MARKET REACTION AND ANALYSIS

WPP shares, which had fallen almost 60% from their early 2017 highs below 800p recently, were whipped up in the wake of the results, quickly climbing more than 7% to above 880p, maintaining the gains into Friday afternoon.

Morgan Stanley analysts said they forecast a 2.2% decline for 2019, with the City consensus expecting -1.6%.

With management guiding to a margin down circa 100 basis points in 2019 at 14.3%, Morgan Stanley noted this was not far from consensus at 14.4%, implying 2019 EPS in the range of 95p-99p, versus consensus at 99.6p.

Shore Capital's Roddy Davidson was pleased to note the slightly better than forecast financial performance and "evidence of progress in re-booting WPP post the departure of Martin Sorrell".

He added that the company has "a lot to get through from an execution perspective", but he views the current stock valuation, with 2019 and 2020 p/e ratios of 7.8x and 7.4x and dividend yield ratios of 7.3% for both years, "undemanding and fails to reflect several underlying positives" that he sees as "the resources / impressive track record of its agency brands; its creative capabilities; the strength of its blue-chip client relationships, and; its integrated global offering".

Offering a contrasting view, Steve Liechti at Numis said the shares "look optically cheap but we still see material challenges and forecast pressure for WPP to adapt to the new/changed marketing services environment".