WPP Plc

WPP Plc (LON: WPP) is an FTSE 100-listed communications services Group. The Company extends the services to some of the world's leading national and multinational clients.

Investment Highlights – WPP Plc – Buy at GBX 634.00

• The Company is transforming business and has integrated Wunderman Thompson and VMLY&R agencies to deliver results.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow and Price/Book Value multiples of the WPP Plc are currently lower as compared to the corresponding multiples of the Media & Publishing It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (GBX 626.08) simple moving average prices, which reflects an uptrend in the stock.

Key Risks

• The Company operates in a highly competitive market and needs to evolve constantly, failure to do so will impact financial performance.
• The Company may face operational issues if it fails to implement transformation plans and will result in reduced market share.

Financial and Operational Highlights – H1 Financial Year 2020 (30 June 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2020, due to weak performance in Q2 FY2020 from business in India, Germany, Greater China, the UK and the US, the reported revenue declined by 12.3%, while revenue in Q2 FY2020 declined by 18.4% in Q2 FY2020.
• The Company witnessed a decline in profitability in H1 FY2020. Despite the decline in profits for the period, the Company managed to save £296 million of costs in the first half of the financial year 2020 and remained on track to deliver the upper end of the set target of £700 million - £800 million.
• Driven by strong working capital management and Kantar transaction, the Company managed to reduce net debt by £1.5 billion versus H1 FY2019.
• WPP posted strong new business performance in H1 FY2020, driven by improved collaboration and enhanced offer. The trading for the current period showed sequential improvement, while the market remains volatile.

One Year Share Price Chart

Daily Chart as of 15 September 2020, before the market close at 12:15 PM GMT+1 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. Despite the decline in financial performance, the Company is on track to deliver the upper end of set target for costs savings. Driven by strong working capital management, WPP managed to reduce net debt in the first half of FY2020. The Company showed a steady improvement in revenue less pass-through costs in July 2020, despite the market volatility.

The Company’s operations were boosted by the depth of client relationships, renewed strength of global networks and strong financial position. The recent acquisition will help the Company to expand its business in a new market. The Company believes macroeconomic environment to remain uncertain and expects the full-year outcome to be in the range of analysts' expectations with revenue less pass-through costs of in between -10.0% to -11.5% of LFL basis and headline operating margin to be in between 10.4% to 12.5%. The stock made a 52-week low and high of GBX 450.00 and GBX 1,085.50, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation for WPP Plc at the current price of GBX 634.00 (as on 15 September 2020, before the market close at 9:15 AM GMT+1), with single-digit upside potential based 12.40x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

Pearson Plc

Pearson Plc (LON: PSON) is an FTSE 100 index listed Company, which provides learning services by providing assessment, content, and digital solutions to universities, colleges, and schools.

Investment Highlights – Pearson Plc – Buy at GBX 514.00

• As per valuation metrics, EV/EBITDA, Price/Cash Flow and Price/Book Value multiples of the Pearson Plc are currently lower as compared to the corresponding multiples of the Media & Publishing It reflects, shares are undervalued as compared to the industry.
• On the liquidity front, Pearson Plc’s current ratio was higher than the industry median of 1.24, reflecting sufficient liquidity to meet short-term obligations and to tackle the impact of coronavirus. The liquidity position is continuously increasing since FY2017.
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 29 level), which means the stock price could increase in the short term.

Key Risks

• The prolonged closure of schools and test centres could increase liquidity risk.
• Moreover, failure to adopt new technologies can impact the competitive positioning. 

Financial Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2020, due to covid-19, the underlying revenue declined by 17% and reported sales declined by 18%. The Company witnessed sales improvement in June, and Online Learning sales globally increased by 5%.
• The reported basis the operating profit improved due to reduced restructuring costs and profit on disposal of Penguin Random House. While in adjusted bases, the Company reported operating loss.
• The Company has a strong balance sheet and managed to reduce net debt to £982 million. The liquidity position stood at £1.6 billion as on 30 June 2020 and maintained an interim dividend of 6 pence in H1 FY2020.
• The Company made decent strategic progress and managed to improve NPS (net promoter scores).

One Year Share Price Chart

Daily Chart as of 15 September 2020, before the market close at 12:18 PM GMT+1 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has shown a decline in revenue on both reported and adjusted basis. The Company witnessed sales improvement in June. The Global Online Learning business shall benefit from Virtual Schools. Moreover, decent recovery is expected for Global Assessment and North American Courseware businesses in H2 FY2020. The Company expect full-year net interest charge to be around £60 million after the issuance of 10-year Education Bond of £350 million in June 2020. However, the Q2 FY20 trading was in line with expectations as reopening of schools after lockdown easing bolstered the confidence. Therefore, the Company now expects to deliver the full-year adjusted operating profit broadly in line with market expectations. The stock made a 52-week low and high of GBX 412.08 and GBX 878.00, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Pearson Plc at the current price of GBX 514.00 (as on 15 September 2020, before the market close at 2:36 PM GMT+1) with single-digit upside potential based 19.50x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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