ii view: why WPP shares just hit a 52-week high

Debt at a 16-year low and share buybacks to restart. Has this ad agency rediscovered its mojo?

Full-year results to 31 December 2020

• Revenue down 9% to £12 billion
• Adjusted pre-tax profit down 24% to £1.04 billion
• An unadjusted pre-tax loss of £2.79 billion, down from a profit of £1.2 billion
• Final dividend of 14p per share
• Total 2020 dividend payment of 24p per share, up 6% on 2019
• Share buyback programme of £300 million
• Reiterated guidance for 2021

Chief executive Mark Read said:

"While revenue was significantly impacted as clients reduced spending, our performance exceeded our own expectations and those of the market throughout the year. There is no doubt that the actions we took during the previous two years to transform and simplify the business and reduce debt - to a 16-year low at the end of 2020 - played a crucial role in the strength of our response.

"At the height of the pandemic we saw five years' worth of innovation in five weeks, with a dramatic shift to digital media and ecommerce as people's lives went online - trends on which we based our vision for WPP. Having modernised our client offer, refined our structure and strengthened our agency brands, we were well prepared for this shift and saw the benefits of this acceleration in parts of our business. 

“While uncertainties remain around the impact of the vaccine roll-out and economic growth, we continue to expect 2021 to be a year of solid recovery."

ii round-up:

Full-year results for advertising business WPP (LSE:WPP) were accompanied by plans to recommence its share buyback programme. Up to £300 million will be used near-term, with expectations for a return to revenue growth over the second quarter of 2021 reiterated and net debt falling by more than expected. 

WPP shares hit a 52-week high in UK trading, leaving them up by more than 45% over the last year. Shares of Pearson (LSE:PSON), which has also undergone significant restructuring, are up by more than 50%, while virus hit exhibitions providers RELX (LSE:REL) and Euromoney Institutional Investor (LSE:ERM) are both up less than 10% over the last year.

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.

Planned annual cost savings of £600 million through to 2025 are to help it invest £200 million to £400 million annually in faster-growing digital and e-commerce, through targeted and scalable acquisitions. Advertising has increasingly moved online with the likes of Alphabet Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) now key players. 

Both revenues and adjusted profit at WPP fell over the year as customers cut spending on advertising at the height of the pandemic. Operating margin over 2020 fell by 1.5% to 12.9%.

Headline margin in the range of 13.5% to 14% is being targeted for 2021, with mid-single digit revenue growth forecast compared to a loss of 6.5% in the latest fourth quarter. 

An unadjusted pre-tax loss of £2.79 billion included £3.1 billion of impairments costs relating to acquisitions whose carrying values had been reassessed in the wake of the pandemic.

The fall in group net debt to £0.7 billion comfortably surpassed City expectations and came amid strong cash management and partly as a result of reduced overdue debtors. Debt is now at a 16-year low. 

Push by management initiatives and growth in ecommerce under the pandemic, client spend on digital media increased to 59.3% of total spend in 2020. Up from 51.6% in 2019.

A final dividend of 14p share made for a total 2020 payment of 24p per share, up 6% on 2019, although down from 60p per share over 2018 following the group’s reset strategy. 

ii view:

Since its change of strategy in late 2018, WPP has sold more than 60 businesses and investments, raising over £3.5 billion. Clients include 348 of the Fortune Global 500, all 30 of the Dow Jones constituents, 70 of the Nasdaq 100 and 69 of the FTSE 100.

Recent terms highlighted over 2020 include a continuation in traditional linear TV channel advertising but growth in streaming services. Falls in advertising for outdoor, cinema and print are largely due to the pandemic. It won a total of $4.4 billion in net new business during 2020. Key wins included business for Intel, HSBC and Unilever. 

For investors, the positions which digital giants Alphabet and Facebook have established in the online space will not be easy to match. A forecast price/earnings ratio above the three and 10-year averages also suggests the shares are not obviously cheap. But group efforts to compete in the digital arena look to be gaining momentum. The reduction in net debt and previous rebasing of the dividend offers increased financial flexibility, with a return to share buybacks injecting some share price support. In all, while WPP remains a work in progress, the risk and reward balance now looks far more favourable. 

Positives: 

• Share buyback programme restarted
• 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