WPP: Modest Discount Persists

Interim results for WPP (WPP.L) (reported end August) showed good like-for-like growth of 3.6% at constant currency, albeit at a slower pace in Q2. The growing contribution from newer markets – organic and from more recent acquisitions – should help offset concerns over the continuing expected slowdown of European and North American markets, with no major events to power corporate spend. Further growth in margin is targeted, as are better internal cross-selling and co-operation, termed ‘horizontality’. The dividend was raised 18%, supported by strong cash flow.

Improving use of group resource
The focus on internal efficiency, be it shared service centres, delivering from lower-cost geographic resource, outsourcing where appropriate or systems improvements should help drive further improvements in margin, as should the increasing proportion of the business from digital-based activities. Variable staff costs represented 6.4% of H112 revenues, lower than the 6.9% registered for H111 but still representing a fair degree of flexibility. The increased emphasis on horizontality implies a continuing move away from a traditional silo mentality, which should also lead to more efficient use of physical and creative resource.

Acquisition programme continues
WPP has continued to build its position through acquisition in the first half, with the emphasis firmly on growing the offer in its newer (faster-growing) markets and building on its digital capability. Prices in Brazil and India are still very inflated, but other markets such as Russia and China and smaller markets like South Korea are proving more fertile hunting grounds. 40 smaller and medium-sized acquisitions were completed in H112, with spend of £90m. The full-year target remains £300m+.

Valuation: Modest discount persists
Omnicom has been the best performing of the majors over the last six months, while Dentsu has lagged the most. WPP’s share price performance has been somewhat better over the last quarter such that it, Omnicom and Publicis are standing broadly at similar levels for current year on an EV/EBITDA basis. On a P/E basis, WPP is on a 13% discount to the larger sector peers closing slightly to 11% for FY13, but still giving scope for upside.

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