strategy update brings some festive cheer

strategy update brings some festive cheer


WPP - strategy update brings some festive cheer

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WPP has given details of its new strategy, which will see it focus on becoming a leaner, and more technology-focused, company.

The group intends to make further disposals, and unify several strands of the business. WPP expects to spend £300m on the transformation, which it says can achieve annual savings of £275m by 2021. The dividend is set to be held at 60p in the near term.

There’s no commentary on current trading, but the group has revised its expectations for like-for-like net revenue growth this year from -0.5% -1% to ‘closer to -0.5%’.

The shares were up 6.5% on the news.

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Our View

The group may be PR masters by trade, with net revenue trends falling pretty much across the board, major contracts slipping away and margins coming under pressure, there aren’t many positive news stories to spin out of recent results.

The problems are centred on North America, WPP’s highest margin and highest revenue market, where sales are continuing to sink. With all other geographies weaker than forecast too, WPP’s performance has been lagging its rivals.

In WPP’s defence, advertising is a cyclical beast, and there will always be peaks and troughs. Add in the disruption from losing a CEO that led the group for 33 years, and some underperformance was always a possibility.

However, we can’t help but think the current problems are more than just the normal ups and downs.

The industry is becoming ever-more digital, and the rise of the likes of Facebook and Google mean there’s a new type of media giant in town. WPP had played down those worries, blaming spending cuts at big consumer goods firms instead, but it’s hard to imagine the US tech groups aren’t having an effect.

With that in mind, it’s no surprise the new strategy calls for an increased focus on helping partners succeed in marketplaces such as Amazon and Alibaba. That seems sensible, as do plans to slim down the business by disposing of surplus agencies and interests.

The disposals have clear benefits. Not only will they help reduce the £4.5bn of net debt, which has sneaked beyond the target range, they should help the new management get a grip of the business. Years of acquisition-led expansion under Martin Sorrell saw WPP swell into a sprawling behemoth.

WPP is targeting a steady dividend, and the prospective yield is 7.5%. That high yield should mean investors are paid to wait and see whether Mark Read & co. can deliver a recovery.

Still, the current challenges are significant, and turning around a supertanker can take time.

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Third quarter trading details (25 October 2018)

WPP announced disappointing third quarter results, with underlying net revenue falling 0.9% to £3.1bn. The group had reported growth of 1.4% over the first half.

The decline in net revenue is driven by a 1.5% fall in like-for-like (LFL) net revenues.

Declines were sharpest in the group’s advertising and media investment management division, its largest by net revenue with £1.3bn this quarter. LFL net revenues here dropped 4%, significantly below a 0.8% decline in H1.

LFL trends in Data Investment Management improved slightly to -1.2%. The PR and Public Affairs and Brand Consulting, Health & Wellness and Specialist Communications divisions saw LFL net revenue rise, 2.5% and 0.4% respectively, but both are behind the growth reported in the first half.

It’s a similar story geographically, with net revenue trends worsening in all four of the group’s main areas. North America, the group’s most important market with net revenue of £1.1bn, saw like-for-likes fall 5.3%, accelerating falls of 2.9% from the first half. This was driven by both client losses and spending cuts.

The UK and Western Europe, with combined net revenues of £1bn, reported LFL net revenues of -2% and -0.4%, against growth of 1.5% and 1.9% in the first half.

Business in the rest of the world brought in just shy of £1bn in net revenue. While LFLs were positive, up 2.4%, growth was behind the 2.6% seen over H1 as weakness in Australia and New Zealand weighed on strong progress in many Emerging Markets.

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