WPP plc (WPP) Ordinary 10p

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WPP reported like-for-like (LFL) net revenue growth of 0.5% to £2.8bn, ahead of market expectations. Small amounts of growth in North America and Western Continental Europe did just enough to offset a 21.3% decline in China.

There was $1.5bn of net new business awarded in the period, up slightly on the prior year. Client wins included Amazon, Unilever and Henkel.

Underlying net debt fell £0.3bn to £3.6bn at the end of the third quarter. The sale of its majority stake in FGS Global is expected to be completed before the end of 2024. This will bring in around £604mn of cash after tax, which will be used to reduce debt levels.

Full-year guidance has been maintained, with LFL net revenue growth of -1% to 0% expected. Medium-term guidance has been reiterated, pointing to LFL net revenue growth of 3% and operating profit margins of 16-17%.

The shares rose 4.3% in early trading.

Our view

WPP’s third-quarter revenue growth beat market expectations. But macroeconomic uncertainty means management’s keeping a lid on expectations heading into the fourth quarter, which laps some tough comparative numbers. New business won in the third quarter won’t begin contributing to revenue until the new year either, meaning there’s room for disappointment in the near term.

At its core, WPP’s media agencies deliver products and services spanning all parts of the advertising and communication spectrum. It boasts some of the world’s largest companies as its customers, and provides them with analytics, paid advertising campaigns and PR. As an idea of scale, WPP boasts a global workforce of 115,000. That’s a lot of mouths to feed and can amplify the downside to profits when revenue dries up.

The group has had a laser-like focus on boosting its digital marketing offerings. The new company plan involves focusing on faster-growing end markets (like how to help clients succeed online) and technology. Hundreds of millions will be spent over the next few years, most of which will go on new staff, technology, including AI, and incentives.

Before it can reach a home stretch, it's worth remembering that WPP's agency business is still being nibbled away at, and it's turning to acquisitions to keep growth coming. The group's doing what it can to combat these challenges, including consolidating and streamlining its offering.

The sale of its stake in PR firm FGS Global should bring in around £0.6bn of cash after taxes. This will be used to pay down debt levels, strengthening the balance sheet and providing wiggle room to invest in itself, or make acquisitions should attractive opportunities arise.

Looking further ahead it's important not to understate the challenge. There are cracks appearing in some of WPP's larger markets and margins are coming under pressure. With rising competition from more nimble providers, a threat that's only likely to grow, there are arguably limits to the market's mood where WPP is concerned.

We’re also mindful of AI. This offers enormous opportunity for WPP, but also risk. There’s a chance the advertising and analytics landscape changes so fast that WPP is left behind if it doesn’t peddle fast enough.

WPP is working hard to try to future-proof the business. But progress hasn’t been as swift as some other names in the advertising world, particularly those that have a direct channel to consumers. There are serious questions here about the viability of its agency model that investors will want to see answered sooner rather than later.

Environmental, social and governance (ESG) risk

The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.

According to Sustainalytics, WPP’s management of ESG risk is strong.

The group has a board-level sustainability committee assisting in its oversight of corporate responsibility and sustainability matters. Advertising companies collect, analyse and process large volumes of sensitive client data, and there are often large fines in place for failing to comply with privacy or security regulations. WPP’s due diligence process includes a review of ethical risks, such as bribery, corruption, and human rights issues.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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