News Column

EARNINGS PREVIEW: WPP Profit To Rise, But Sterling Hit Remains

August 22, 2014

Hana Stewart-Smith

LONDON (Alliance News) - Media buying giant WPP PLC is set to report higher pretax profit when it reports its interim results on Tuesday, buoyed by the continued recovery in the global advertising market, but analysts are concerned that it will also take a further hit from the strength of sterling.

The company's stock fell sharply in late February when it revealed that its pretax profit rose 20% in 2013, but its operating margin had been held back by the strength of sterling. In April, it retained its forecasts for 2014 after reporting higher first-quarter revenue, but again warned that the pound's strength was weighing on margins.

WPP expects like-for-like revenue to grow strongly in 2014 as a whole, and "gross margin or net sales growth of over 3%". It is targeting headline gross margin or net sales margin improvement of 0.3 point on a constant currency basis.

"With currency having been the explanation for a margin miss in 2013, and management’s guidance for 30bp of improvement in 2014, but on a pre-currency basis, risks must be growing that this is becoming a harder target to achieve now that the pound has strengthened further," Berenberg said in a recent note to clients.

Numis Analyst Paul Richards, who has an Add rating on the stock, is forecasting that WPP will report a pretax profit of GBP515 million for the six months to end-June, up from GBP427.1 million in the first half of 2013, and forecasts earnings per share of 27.9 pence, up from 22.3p last year and a touch above the consensus forecast of 27.8 pence.

WPP reported revenue of GBP5.33 billion in the first half of 2013, and while this is set to rise when it reports this year's interim results, Numis expects the strength of sterling to knock revenue by 8% in the first half, and 6% for the full year.

When the company updated shareholders on its performance in the first five months of the year at the annual general meeting in June, it said its revenue had risen 1.2% to GBP4.43 billion, and gross margins and profits were ahead of the previous year and in line with targets. However, the pound's strength hit revenue by around 8.6% in the first five months, increased from the 8.1% hit it reported in the first quarter.

Richards noted that WPP's peers had already reported their interim results, with Omnicom Group Inc and Interpublic Group of Companies Inc both seeing strong performances, and Publicis Ltd hit by company specific issues, including an aborted merger with Omnicom.

"WPP has underperformed the market by mid-single digit over the past one month and three months and in our view looks attractively valued at under 13 times 2015 earnings," Richards said.

In June, WPP had said that the the economic pattern for 2014 looks very similar to 2013, albeit with slightly increased client confidence, with slightly stronger global gross domestic product growth forecasts, and events such as the Winter Olympics in Sochi and Fifa World Cup in Brazil.

"All in all, 2014 looks likely to be another demanding year, as a strong pound and weak faster growth market currencies continue to take their toll on our reported results, but if budgets and quarter one revised forecasts are met, 2014 will be another strong year," Chairman Philip Lader had said in the AGM statement.

Berenberg maintained its Sell rating on WPP following the annual general meeting, saying that it continued to believe WPP is expensive on the basis of free cash flow after the cost of buying back stock to cover compensation and the costs of mergers and acquisition, which it sees as necessary for WPP to maintain its growth and margin improvement.

Berenberg said that whilst it expects some improvement in WPP, and expects the second quarter to turn out similar to, or slightly better than, WPP's first quarter, it does not see any reason to upgrade its full year estimate of 4% like-for-like net sales growth.

It noted that whilst the FIFA World Cup would be helpful in June and July, it faces tougher comparitives in the second half, and said it is had to see how it can beat consensus.

"Given that WPP’s definition of like-for-like growth is pro-forma, rather than organic (the figures are compared with what they would have been last year, had acquisitions during the period been consolidated at that time) and as we do not know the phasing of acquisitions, or their relative size, it is hard to take a firm view that there has been a material “organic” improvement," Berenberg said.

"It would be possible to report accelerating pro-forma growth were acquisitions more sizeable in April and May, and of faster growing assets," the investment bank added.

Shares in WPP are trading down 0.3% at 1,224.92 pence Friday afternoon.

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Source: Alliance News

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