ii view: WPP targeting digital growth acquisitions

This advertising giant may have lost its gloss but is now further revamping strategy to help it shine. 

Strategy and trading update 

• Targeting annual cost savings of £600 million through to 2025
• To invest £200 million to £400 million annually in scalable acquisitions
• October and November like-for-like revenues down 6.7% 
• Expects to return to 2019 levels of revenue less pass-through costs by 2022

Chief executive Mark Read said:

"It has been two years since we set out our strategy to return WPP to growth. Since then, we have made significant progress, with stronger agency brands, new leadership, a simpler structure and a strong balance sheet. 

"The events of 2020 have only accelerated the structural changes in our industry, from the expansion of digital channels to growing demand for ecommerce solutions. The actions that we have taken have positioned us well.

"In partnership with our agency brands we are deepening and accelerating the change already happening within WPP. We aim to return our Communications business to sustainable growth and invest further in the high-growth areas of Commerce, Experience and Technology.”

ii round-up:

Advertising and marketing specialist WPP (LSE:WPP) outlined a series of strategic goals which included returning its core communications business to sustainable growth, along with an update on current trading. 

Annual cost savings of £600 million through to 2025 will help it invest £200 million to £400 million annually. This will go on faster-growing digital and e-commerce through targeted and scalable acquisitions. Advertising has increasingly moved online with the likes of Alphabet Google and Facebook now key players. Investment in talent and technology will be central. 

An operating profit margin in the region of 12.5% to 13% suggests current full-year earnings per share (EPS) of around 61p, according to broker Morgan Stanley – around 7% to 10% better than current City forecasts. 

WPP shares rose around 4% following the update. Year-to-date its shares are down by just over a fifth. Shares for TV broadcaster and advertiser ITV (LSE:ITV) are down by over a quarter in 2020, while Scottish TV company STV Group (LSE:STVG) is down by a similar amount. Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) shares are both up around 30% year-to-date. 

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. It now operates through fewer agency brands. Bank of America noted that “acquisition ambitions are an end to the simplification message of the past two years.”

Looking ahead, WPP plans to move further into commerce, customer experience and technology. Growing these areas to 40% of its business by 2025 compared to 25% today. Financial targets now include double-digit headline EPS growth over the next three years, and a new dividend policy to grow the payment annually at a pay-out ratio of around 40% of EPS – down from a previous 50%.  

Full-year results are likely to be announced in late February. 

ii view:

WPP employs more than 105,000 people in over 100 countries. Its clients include 348 of the Fortune Global 500, all 30 of the Dow Jones 30, 70 of the Nasdaq 100 and 69 of the FTSE 100. Since its change of strategy in late 2018, it has sold more than 60 businesses and investments, raising over £3.5 billion. It has merged 100 small, local offices and closed a further 80 business units. It won $5.6 billion of new business in the first nine months of this year including work from Alibaba (NYSE:BABA), HSBC (LSE:HSBA), Intel (NASDAQ:INTC), Uber (NYSE:UBER) and Unilever (LSE:ULVR). 

A first-half loss of over £2 billion to the end of June came as it took impairment costs relating to acquisitions whose carrying values had been reassessed in the wake of the pandemic. Revenues fell 12.3% to £5.58 billion. 

For investors, the positions which digital giants Alphabet and Facebook have established in the online space will not be easy to match. Declining pre-tax profit since 2017 still overshadows. And a forecast price/earnings ratio above the three-year average also suggests the shares are not necessarily cheap. But group efforts to compete in the digital arena offer reassurance, while an earlier year return to dividend payments – albeit at a halving of the previous level – suggests a degree of confidence in the outlook. For now, while some caution looks sensible, the balance between risk and reward may just be tipping towards the latter. 

Positives: 

• Ongoing changes to increase growth
• Net debt of £4.9 billion in September 2018 is expected to fall to £1.6 billion at year-end

Negatives:

Alphabet Google and Facebook have built significant advertising businesses

First-half operating profit fell by 38% to £382 million

The average rating of stock market analysts:

Strong hold