WPP — Update 19 May 2016

WPP — Update 19 May 2016

WPP

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

WPP

2016 - a maxi-quadrennial year

Media

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19 May 2016

Price

1,576p

Market cap

£21bn

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Share details

Code

WPP

Listing

LSE

Shares in issue

1,313m

Business description

WPP is the world’s largest communications services group, providing a full range of advertising and marketing services including advertising & media investment management; data investment management; PR & public affairs; branding & identity; healthcare comms; direct, digital, promo & relationship marketing and specialist comms.

Bull

Strong net new business performance.

Improving net sales margin.

Maxi-quadrennial year.

Bear

Geopolitical uncertainties.

Client caution/risk aversion.

New market entrants/changing competitive landscape.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5757

WPP is a client of Edison Investment Research Limited

A good Q1 performance showed year-on-year net sales growth slightly ahead of budget at 3.2% (constant currency, like-for-like), with the US, UK and Western Continental Europe in the vanguard. 2016 is set to be a strong year for advertising, with the normal even year effect boosted by the forthcoming Rio Olympics, UEFA Euro Football Championship and US presidential election. WPP’s strong forecast earnings growth, 12% CAGR 2015-17e (in a 10-15% target range), provides scope for rating expansion.

Good Q1 bodes well for the year

A recent spate of client reviews of large media budgets has come down firmly in WPPs favour, aided by the investment the group has made in recent years in integrating data and technology. North America was the best performing region in Q116, primarily reflecting good like-for-like net sales growth for Advertising & Media IM of 3.4% (+7.9% at the revenue level, the strongest performance in the group). Data IM continues to drag on the overall group result, with flat like-for-like net sales year-on-year. The Branding & Identity, Healthcare & Specialist division made the greatest progress at the net sales level, despite a subdued result in Healthcare. The April 2016 acquisition of STW in Australia gives the group the number one position in marketing services in Australia and New Zealand and makes that region the group’s fifth largest market.

Premium earnings growth

Company guidance for FY16 shows like-for-like revenue growth of “well over” 3% and net sales growth of “over 3%”. With the full year benefit of acquisitions made in 2015 and a positive contribution from currency movements, forecast net sales for the year should grow well ahead of the industry, which current projections show as progressing at around 4.8% (range of 4.5-5.7%). WPP’s premium growth in earnings per share is driven by a combination of the same four factors described for some time: organic growth, margin expansion, share buybacks and small- and medium-sized acquisitions. The FY16 target for net sales PBIT margin expansion is +0.3% to 17.2% (FY15: 16.9%, FY14: 16.7%), moving towards an ultimate target of “almost” 20%.

Valuation: Scope for rating expansion

WPP is currently trading at around a 10% discount to the other global media stocks on FY16e P/E and carries a prospective dividend yield of 3.3% – well ahead of its peers, which currently offer an average yield of 2.3%.

Consensus estimates

Year
end

Revenue
(£bn)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

11.5

1,452

82.9

38.2

19.0

2.4

12/15

12.2

1,493

93.6

44.7

16.8

2.8

12/16e

13.4

1,671

106.9

52.1

14.7

3.3

12/17e

14.2

1,812

116.7

57.3

13.5

3.7

Source: Company accounts, Thomson Reuters

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Regeneus — Update 19 May 2016

Regeneus

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