ii view: WPP downgrades sales hopes on China challenges

First-half results to 30 June

• Adjusted like-for-like (LFL) revenue down 1% to £5.59 billion
• Adjusted operating profit down 3% to £646 million
• Adjusted net debt of £3.4 billion, down from £3.5 billion

Guidance:

• Now expects full-year adjusted like-for-like revenue of between -1% and 0, down from 0 to +1% 
• Continues to expect annual headline operating profit margin to improve by between 0.2% and 0.4%

Chief executive Mark Read said:

"At our Capital Markets Day earlier this year we set out our strategy to build on and improve the competitiveness of WPP's offer. I am very pleased with the progress we have made in the past six months. 

“The steps we have taken since January to integrate our offer, bring in new talent and invest in AI represent strong progress towards delivering on our medium-term financial targets and to shareholders."

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ii round-up:

WPP (LSE:WPP) today detailed below forecast sales with the global ad agency lowering its expected full-year sales estimate given challenges at its China business. 

Adjusted second-quarter revenues fell 0.5% year-over-year, missing City estimates for a drop of 0.4%, leaving first-half revenue down 1% from a year ago at £5.59 billion. WPP, which owns agencies include Ogilvy, Finsbury and Mindshare, now expects growth in full-year adjusted revenue of between -1% and zero, down from a previous zero to +1%. 

Shares in the FTSE 100 company fell 3% in UK trading having come into these latest results down 5% year to date. That’s behind a 22% improvement for ad driven ITV (LSE:ITV). The FTSE 100 index is up almost 5% in 2024.  

WPP’s services include core communications such as media ad buying and planning along with Public Relations. Client losses such as KFC owner Yum Brands Inc (NYSE:YUM) in China contributed towards a 24% decline in second-quarter revenues.

Elsewhere, UK sales on the same basis retreated 5.3%, with those for the Rest of the World down 2.2%. Sales in its biggest region, the US, rose 2%, while India climbed 9%.   

WPP also announced the disposal of its majority stake in public relations agency FGS Global. A sale to KKR will generate cash proceeds after tax of £604 million. Proceeds will be used to reduce group debt, which dropped marginally from a year ago to £3.4 billion as of late June.

An ongoing focus on costs leaves management continuing to expect growth of between 0.2% and 0.4% in the operating profit margin over the full year. 

The interim dividend is unchanged at 15p per share and is payable on 1 November. A third-quarter trading update is likely late October or early November.   

ii view:

Originally a maker of wire baskets and teapots called Wire and Plastic Products, WPP today operates in more than 100 countries, employing over 100,000 people. Global Integrated Agencies taking in ad-related services generate most of its revenues at around 85% during 2023, followed by Public Relations at almost 9% and other Specialist agencies the balance of around 6%. Group clients include just over 300 of fortune 500 companies, with names such as International Business Machines Corp (NYSE:IBM), L'Oréal, LVMH, Nestle SA (SIX:NESN) and Coca-Cola Co (NYSE:KO) all on its books. 

For investors, heightened borrowing costs and a tough economic backdrop for markets such as China cannot be ignored. Curtailed spending by technology clients following investment booms for many during the pandemic is likely to persist. Artificial intelligence (AI) and its potential to change the existing environment requires thought, while costs for businesses generally and including wages are now elevated. 

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On the upside, WPP is driving a performance improvement programme called ‘Innovating to Lead’ which includes the use of AI to assist clients and better cost efficiency. Diversity in terms of both product and geographical region exist, debt is being reduced, while a forecast dividend yield of over 5% is not to be overlooked. 

In all, expected interest rate cuts and their potential to assist future demand offer medium term optimism. However, with demand currently uninspiring, investors may want firmer signs of recovery before committing to the stock.

Positives: 

• Diversified product and geographical offering
• Attractive dividend (not guaranteed)

Negatives:

• Advertising demand is historically cyclical
• Foreign exchange movements can hinder

The average rating of stock market analysts:

Hold