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 – Hold at GBX 651.80

1. The Company is transforming business and has integrated Wunderman Thompson and VMLY&R agencies to deliver results.

2. WPP posted strong new business performance in H1 FY2020, driven by improved collaboration and enhanced offer.

3. In the last one month and three months, the Company delivered a decent return of 9.82% and 3.24%, respectively, and delivered slightly higher returns compared to the FTSE-100 index.

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


(Source: Interim Report, Company Website)
 

1. In the first half of the financial year 2020, the reported revenue declined by 12.3% and 11.5% on an LFL basis to £5,583 million (H1 FY2019: £6,368 million). The reported revenue declined by 18.4% in Q2 FY2020.

2. Due to weak performance in Q2 FY2020 from business in India, Germany, Greater China, the UK and the US, the revenue less pass-through costs in Q2 declined by 15.1% on an LFL basis. The revenue less pass-through costs declined by 10.2% and 9.5% on an LFL basis in H1 FY2020.

3. The headline operating profit declined by 38.1% to £382 million, while the Company reported an operating loss of £2,453 million in H1 FY2020. 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.

4. The loss before tax for H1 FY2020 was due to the impact of COVID-19, impairments, higher discount rates, lower industry growth rates and lower profit base in 2020.

5. The net debt stood at £2.7 billion as on 30 June 2020, down by £1.5 billion versus H1 FY2019, reflecting strong working capital management and Kantar transaction.

One Year Share Price Chart


Daily Chart as of August 27, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Key Risks

The resurgence of Covid-19 cases can cause another round of business disruption. The Group operates in a highly competitive market, where the risk of losing a client to competitors is quite high. 

Technical Performance

From the technical standpoint, shares were trading well above the short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology



As per valuation metrics, EV/Sales, EV/EBITDA and Price/Cash Flow multiples of the WPPPlc are currently lower as compared to the corresponding multiples of the Media industry. It reflects, shares are undervalued as compared to the industry.

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. WPP operations were significantly impacted by the outbreak of covid-19. 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’s operations were boosted by the depth of client relationships, renewed strength of global networks and strong financial position. The Company showed a steady improvement in revenue less pass-through costs in July 2020, despite the market volatility. The Company believe 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%.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance for WPP Plc at the current price of GBX 651.80 (as on 27 August 2020, before the market close at 11:16 AM GMT+1) and will recommend fresh buying at the right time.

Rolls-Royce Holdings Plc

Rolls-Royce Holdings Plc (LON: RR.) is a London, United Kingdom-headquartered multinational engineering Company. It focuses on power and propulsion systems.

Recent News 

On 27 August 2020, Rolls-Royce Holdings announced that itsCFO(Chief Financial Officer), Stephen Daintith, has informed the Board to resign from his position.

Investment Highlights – Rolls-Royce Holdings Plc– HOLD at GBX 234.40

1. The Company has accelerated cost mitigations plans to reduce Free cash outflow in the second half of the financial year 2020

2. To reduce the impact of Covid-crisis, RR has launched Fundamental restructuring of Civil Aerospace, including consolidation of global facility footprint and reduction in headcount, to achieve annual pre-tax savings of £1.3 billion by 2022 end.

3. On the liquidity front, Rolls-Royce HoldingsPlc’s current ratio of 1.07 was lower than the industry median of 1.12. Despite the lower liquidity, the Company has sufficient liquidity profile to tackle the uncertainty due to covid-19 outbreak.

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


(Source: Interim Report, Company Website)
 

1. In the first half of the financial year 2020, the reported revenue declined by 26% to £5.8 billion, while underlying revenue declined by 24% to £5.6 billion.

2. Due to the impact of covid-19 resulted in one-off charges in Civil Aerospace of £1.2 billion, the underlying operating loss stood at £1.7 billion, reported operating loss stood at £1.8 billion.

3. Due to significant working capital outflows and 47% lower large engine flying hours, the Company reported Free cash outflow of £2.8 billion in H1 FY2020.

4. On the Liquidity front, the Company has a cash balance of £4.2 billion as on 30 June 2020, along with RCF (revolving credit facility) of £1.9 billion. The Company also announced term loan backed by UKEF (UK Export Finance) for £2 billion in July and finalised in August.

5. The Company expects Free cash outflow of around £1 billion in the second half of FY2020, driven by the acceleration of cost mitigations.

One Year Share Price Chart


Daily Chart as of August 27, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Key Risks

COVID-19 is causing substantial disruptions to the respective supply chains and the end markets, while the customer demand is shrinking as activity levels have reduced. The Group is exposed to a number of market risks, some of which are of a macro-economic nature such as, fluctuations in foreign currencies, oil prices, and interest rates.

Technical Performance

From the technical standpoint, 14-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

 

As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings and Price/Book Value multiples of the Rolls-Royce Holdings Plc are currently lower as compared to the corresponding multiples of the Aerospace & Defenseindustry. It reflects, shares are undervalued as compared to the industry.

Conclusion 

The Company has shown a decline in financial performance for the first half of the financial year 2020. The Company expects the market to remain uncertain despite the economic recovery and easing of travel restrictions.

RR believes business recovery will commence by the end of H2 FY2020, based on a gradual recovery in civil aviation. The Company expects the majority of Power Systems end markets will recover by the end of 2021, and revenue will reach normal levels in 2022, while Defence performance stood resilient.

The Company expects large engine deliveries to increase gradually beyond 2022. The underlying revenue in FY2020 is expected to be 25% to 30% below FY2019 data, with free cash outflow of around £4 billion, liquidity of £6 billion and net debt will increase to £3.5 billion approximately. The Company is targeting to return to positive free cash generation by H2 FY2021 and free cash outflow in FY2021 will be significantly lower versus FY2020.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance for Rolls-Royce HoldingsPlc at the current price of GBX 234.40 (as on 27 August 2020, before the market close at 11:22 AM GMT+1) and will recommend fresh buying at the right time.
 
*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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