ii view: WPP reports record quarterly revenue growth

An economic rebound following the pandemic has seen clients keen to advertise. Buy, sell or Hold?

Full-year results to 31 December 2020

• Revenue up 9.8% to £6.13 billion
• Pre-tax profit of £394 million, up from a loss of £3.18 billion
• Second quarter like-for-like revenue less pass-through costs 19.3%
• Net debt down 44% to £1.5 billion
• Interim dividend up 25% to 12.5p per share
• Share buyback programme of £350 million

Chief executive Mark Read said:

"I'm delighted with our performance in the first six months of the year, at a time when Covid continues to take a toll on many countries. 

"We expect our strategy to translate into benefits for all of our stakeholders: a powerful, modern offer to support our clients' growth; a great place for our people to work; a positive contribution to communities and the environment; and good financial returns for shareholders, with the interim dividend raised 25% and £600 million of share buybacks planned in 2021."

ii round-up:

Advertising agency giant WPP (LSE:WPP) today reported a return to 2019 business levels as its clients looked to benefit from a rebound in economic activity following the global pandemic. 

Second quarter like-for-like revenue rose by 19.3% compared to 2020 levels and made for a second quarter record. That’s up 1.3% on 2019 levels and saw the company returning to activity levels a year ahead of forecast. Buoyant activity underpinned an increase in expected full-year 2021 like-for-like sales growth to between 9% and 10% from a previous mid-single digit level. 

WPP shares rose by more than 2% in UK trading, with the shares having almost doubled since pandemic market lows back in March 2020.  

Shares of fellow media concern Pearson (LSE:PSON), which has also undergone significant restructuring, are up by around 75% over that time. Shares for virus hit exhibitions providers RELX (LSE:REL) and Euromoney (LSE:ERM) are both up less than 50% over that time.

Pre-tax profit of £394 million contrasted with a loss for the first half of 2020 of £3.18 billion. A dividend of 12.5p per share is being paid, up 25% from 10p per share in H1 2020. Shareholder returns also include a £350 million share buyback scheme. 

WPP, whose agencies include Ogilvy, Grey and GroupM, has been pursuing a focus of simplification since late 2018 and following the departure of its CEO and founder Sir Martin Sorrell.

Management’s transformation programme is making good progress. Planned annual cost savings through to 2025 are to help it invest in faster-growing digital and e-commerce via targeted and scalable acquisitions. Advertising has increasingly moved online with the likes of Alphabet (NASDAQ:GOOGL), owner of Google, and Facebook (NASDAQ:FB) now key players. 

A push to consolidate its supplier base and re-tender existing arrangements to enhance opportunities within its £2 billion of annual indirect spend is underway. 

Key client assignment wins during the period included work for AstraZeneca (LSE:AZN), JPMorgan Chase & Co (NYSE:JPM), L'Oréal, and Pernod Ricard (EURONEXT:RI). 

ii view:

Since its change of strategy in late 2018, WPP has sold more than 60 businesses and investments, raising over £3.5 billion. Group clients include 325 of the Fortune Global 500, all 30 of the Dow Jones 30, 62 of the Nasdaq 100 and 61 of the FTSE 100. It employs around 100,000 people with three quarters of its sales coming from its global integrated agencies, just under a tenth from public relations and the balance of around 15% from specialist agencies. 

For investors, the positions which digital mammoths Alphabet and Facebook have established in the online space will not be easy to match. Advertising has been historically geared to economic ups and downs. And changing trends for clients such as the auto industry could result in changes of supplier including advertising agencies. 

That said, group efforts to compete in the digital arena look to be gaining momentum. Reduced debt and a previous rebasing of the dividend provide increased financial flexibility, while share buybacks now inject some share price support. For now, and with the consensus analyst estimate of fair value standing at £10.97 per share, momentum appears to remain in the company’s favour.

Positives: 

• Recommended share buybacks
• Planned annual cost savings of £600 million through to 2025

Negatives:

• Alphabet Google and Facebook have built significant advertising businesses
• Foreign exchange movements can hinder growth

The average rating of stock market analysts:

'Buy'