WPP — Harnessing AI, data and platform

Research: TMT

WPP — Harnessing AI, data and platform

WPP’s capital markets day (CMD) focused on the combination of creativity and AI at scale and how these can be leveraged to boost clients’ businesses. Outline Q423 performance figures were given, along with updated forward guidance, including on restructuring costs and potential payback. We expect market expectations to be broadly unchanged. The overarching narrative of consolidation and simplification, common data platforms and standardised reporting, is coherent and supports the projected margin expansion. To be really convincing, though, top-line growth needs to exceed the 3% indicated, which depends on better performances in both Media and Creative. The rating remains undemanding.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

WPP

Harnessing AI, data and platform

Media

QuickView

31 January 2024

Price

795.6p

Market cap

£8,551m

Share price graph

Share details

Code

WPP

Listing

LSE

Shares in issue

1,074m

Business description

WPP uses creativity on an ever-broader canvas, bringing together talent, resources and skills to provide an integrated offer of communications, experience, commerce and technology for clients. Its agencies operate in 110 countries, working with clients including 317 of the Fortune Global 500, all 30 of the Dow Jones 30, 62 of the Nasdaq-100 and 61 of the UK 100.

Bull

Opportunity to harness AI to leverage growth and improve efficiency.

Scale advantage, particularly in Media.

Potential for operating margin improvement.

Bear

Modest top-line growth.

Execution risk on restructuring.

Tech client exposure.

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

WPP’s capital markets day (CMD) focused on the combination of creativity and AI at scale and how these can be leveraged to boost clients’ businesses. Outline Q423 performance figures were given, along with updated forward guidance, including on restructuring costs and potential payback. We expect market expectations to be broadly unchanged. The overarching narrative of consolidation and simplification, common data platforms and standardised reporting, is coherent and supports the projected margin expansion. To be really convincing, though, top-line growth needs to exceed the 3% indicated, which depends on better performances in both Media and Creative. The rating remains undemanding.

AI as an effective tool, not as a panacea

At the heart of the CMD presentations was the sense of AI giving new opportunities to improve efficiency and effectiveness, enhancing the output and freeing up people from mundane tasks. WPP has been using AI in various parts of the business for up to 10 years, accelerated through the acquisition of Satalia in 2021. This is all now really starting to have a commercial impact, with the WPP Open operating system and platform now rolling out across the group, with two important clients, Nestlé and L’Oréal, already fully migrated onto it. The built-in flexibility means that client data and workflows can be designed to suit the client rather than them needing to adapt, a level of integration that should help with retention down the line. On the Media offering, increasing use of AI should facilitate more effective buying across the digital piece, with the benefits shared with clients.

Simplification to improve efficiency

Since 2018, WPP has consolidated its operations into six market-facing agency networks (fewer would compromise its ability to work for competing clients). Given the scale of the operations, this has been a massive undertaking and there is further to go, in terms of front office commercial delivery and back office integration. The latest moves are designed to save c £125m by FY25, at a similar level of cost and with 40–50% of the savings to be released in FY24. This should help lift the FY24 operating margin to the 15.0–15.2% target, with the medium-term target (three to five years) being 16.0–17.0%, predicated on 3%+ top-line organic growth.

Valuation discount to peers

The 3% top-line growth target looks cautious compared with peers. That is reflected in the rating differential; WPP’s FY24e P/E of 8.2x comparing to peers on 12.2x.

Consensus estimates

Year
end

Net revenue
(£m)

Adj operating
profit* (£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

10,397

1,494

78.5

31.2

10.1

3.9

12/22

11,799

1,742

98.5

39.4

8.1

5.0

12/23e

11,865

1,731

92.6

38.8

8.6

4.9

12/24e

12,056

1,787

96.7

40.7

8.2

5.1

12/25e

12,390

1,881

102.7

43.0

7.7

5.4

Source: Refinitiv. *Adjusted operating profit and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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