Overview
WPP PLC (WPP) is a British holding company headquartered in London, United Kingdom. The group is a world leader in communications services and comprises companies in a range of disciplines. The international advertising and marketing services group was established after Sir Martin Sorrell took a controlling stake in Wire and Plastic Products, a manufacturer of wire baskets and teapots, in 1985. Later, the company was renamed "WPP" and has now become the world leader in communications, experience, commerce and technology, and employs more than 130,000 personnel across 112 countries. The company's clients are the top companies of the world, including 369 of the Fortune Global 500. The group is listed on the London Stock Exchange and the New York Stock Exchange and is a constituent of FTSE 100 index.

Management
The Chairman of the Board is Roberto Quarta; he was appointed on 9 June 2015. He has served as the Chairman of several companies and has an in-depth understanding of global governance requirements. Mark Read is the Chief Executive Officer, he was appointed on 3 September 2018 and has held numerous management positions across the group. Paul Richardson is the Group Finance Director and was named in 1996.

Operating and Geographical Segments
The group offers national and multinational clients a comprehensive range of communications services and is organised into four reportable segments: Public Relations & Public Affairs, Advertising and Media Investment Management, Data Investment Management, and Brand Consulting, Health & Wellness and Specialist Communications – which includes WPP Digital and direct, digital & interactive. The operations are also differentiated into geographical segments - North America, United Kingdom, Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe and Western Continental Europe. The largest geographical segment by revenue is North America, accounting for 34.9% of the sales.

Top Shareholders

 (Source: Thomson Reuters)

Key Statistics

Key Financial Metrics (FY 2018, in £m)

(Source: Company Filings)

Key Financial Highlights (FY 2018, in £m)
The results for FY 2018 were reported at the upper end of guidance given in October. The revenue for the full year declined by 1.3% on a reported basis to £15,602 million, against £15,804 million in FY 2017. However, on the like-for-like basis, revenue increased by 0.8%. The full year like-for-like revenue less pass-through costs were down by 0.4%, ahead of guidance, at £12,827 million. This was due to a decline in North America which reported a continued weakness, with like-for-like revenue less pass-through costs decreasing by 4.2%, driven by difficulties in creative agencies, data investment management and healthcare. UK like-for-like revenue less pass-through costs remained mostly flat as media investment management and specialist communications businesses reported strong business while data investment management improved. The company reported strong performance in Western Continental Europe. Operating profit decreased by 8.9% to £1,962 million, resulting in a decline in operating margin, which fell 110bps to 15.3%. The decline of 9.7% in profit before interest and tax and leading to a drop in PBIT margin of 120bps, was due to restructuring, transformation costs and goodwill impairment. The diluted earnings per share declined by 10.3% to 108p from 120.4p in 2017, reflecting poor performance in headline numbers. The dividends per share remained flat over the year to 60p. Net debt position improved by £466 million at the end of FY 2018 to £4,966 million. However, the EBITDA fell over the year, leading to an increase in the average net debt/EBITDA from 2.0x in FY 2017 to 21.x in FY 2018. The company has strengthened its balance sheet and streamlined its business through 36 disposals, which helped it to raise cash proceeds in 2018 worth £849 million.

Financial Ratios
 
(Source: Thomson Reuters)

Ratios Commentary
The gross margin of the group was significantly less as compared to its competitors, indicating a high level of direct costs incurred by the group. The profitability margins declined in FY 2018 and were below the industry median. The current ratio has remained stable at around 0.96 and is mostly in line with the industry median. However, the times earned ratio declined in FY 2018, signifying lower earnings to cover the interest costs.  The company is more leveraged than its competitors, but the debt position has remained stable over the years. The debt/equity declined slightly, reflecting improvement in net debt of £466 million. The asset turnover ratio has stayed consistent over the years and still has a lot of potential to improve.

Valuation Methodology
Method 1: EV/EBITDA Multiple Approach (NTM)
 

Method 2: Price/Earnings Flow Multiple Approach (NTM)  


To compare WPP with its peers, Price/Earnings multiple has been used. The peers are ITV PLC(NTM P/E was 9.47), Publicis Groupe SA (NTM P/E was 10.26),Informa PLC(NTM P/E was 13.68) and Pearson PLC(NTM P/E was 14.06). The median of Price/Earnings (NTM) of the company’s peers was 11.97x.
 
*All forecasted figures and peers have been taken from Thomson Reuters.
 
 
Share Price Commentary

Daily Chart as at Mar-12-19, before the market close (Source: Thomson Reuters)
 
On 12th March 2019, at the time of writing (before market close, GMT 12:40 pm), WPP shares were trading at GBX 856.6, up by 0.18 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,375.50/GBX 791.00. At the time of writing, the share was trading 37.72 per cent lower than its 52w High and 8.29 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 2,901,199.00; 30 days - 3,624,139.10 and 90 days - 3,584,717.56. The average traded volume for 5 days was down by 19.95 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 8x as compared to the industry median of 10.6x. The company’s stock beta was 1.23, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £10.79 billion and a dividend yield of 7.03% per cent.
 
Risks Assessment and Growth Prospects
Due to client losses in 2018, FY 2019 is expected to be a challenging year for the group, though investments in creativity and technology will improve the competitiveness of the company's offer. The company has reported strong performance in Western Continental Europe. Moreover, the group looks to address its performance in the United States and improve results. The company is at the beginning of a three-year turnaround plan, but the transformations have already borne fruits and have driven several of its recent new business successes. The group operates in a highly competitive and evolving industry where the risk of losing a client to competitors or as a consequence of client consolidation may have an adverse effect. Any downturn in economic conditions may have a material adverse impact on the Group's business as the companies seek to reduce marketing budgets during downturns. The risk in recent time has augmented to due to volatility caused by Brexit in the UK and Europe and slowdown in China.

Conclusion
The strong performance from high growth geographical segments coupled with the group's focus on improving technology signifies a good prospect for the company. Moreover, the company has started implementing a plan which will further reduce its costs and help it to report strong financials. Based on an excellent future prospects supported by healthy increase in marketing expenditure and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 855.00 (as on 11th March 2019) with double-digit upside potential based on 11.97x NTM Price/Earnings on FY19E earnings per share and 7.2x NTM EV/EBITDA  on FY19E EBITDA.

*The buy recommendation is valid for the current price as covered in the report (as on 12th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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