WPP Plc – Operating with strong liquidity and balance sheet

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

Rationale for Valuation – Buy at GBX 588.80

• The Company has continued good momentum in new business and has shown a strong liquidity and balance sheet.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow multiples are currently lower as compared to the corresponding multiple of the Media & Publishing industry. It reflects, shares are undervalued as compared to the industry.
• In the last six months, the Company has delivered a decent return of ~6.71%, which was higher as compared to the FTSE 100 Index.
• From the technical standpoint, 14-day RSI stood at 24.59 (oversold zone), which is supporting the upside movement.

Key Risks

• The Company operates in a highly competitive market, where the risk of losing a client to competitors is quite high.
• The resurgence of Covid-19 cases can cause another round of business disruption.
• It may face operational issues if it fails to implement transformation plans and will result in reduced market share.

Recent News

On 26 October 2020, the Company will announce the appointment of Dr. Ya-Qin Zhang, as a Non-Executive Director, with effect from 1 January 2021.

Q3 FY20 Trading Update (as on 29 October 2020)

(Source: Company Website)

• Despite the challenging environment, the Company delivered a resilient performance, with a strong new business momentum and tight cost control.
• The Company witnessed strong liquidity and balance sheet, with year-to-date average net debt of £2.5 billion (down £2.0 billion year-on-year).
• In Q3 FY20, the markets around the world have shown an increase in economic activity as compared with Q2 FY20. This shows an improving trend in business performance.
• In term of revenue, all business and regions segments have shown an improving trend over Q2 FY20.
• In new business, the Company has continued good momentum, with US$1.6 billion won in Q3.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In the third quarter of 2020, the Company has shown a recovery in activity and cost management. 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 cost of in between -8.5% to -10.7% of LfL basis and headline operating margin to be in the range of 11.4%-12.5%. The Company’s operations were boosted by the depth of client relationships, renewed strength of global networks and strong financial position. Further, the Company has maintained a strong financial position and is on track to deliver the upper end of the £700-800 million targets for cost savings. Led by strong working capital management, the Company managed to reduce net debt in the third quarter of 2020. The stock made a 52-week low and high of GBX 450.00 and GBX 1,085.50, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on WPP at the current market price of GBX 588.80 (as on 29 October 2020, before the market close at 8:20 AM GMT), with lower double-digit upside potential based on 13.2x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

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

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