Marketing is all about the art of persuasion and Mark Read, the WPP boss, had been winning over investors before the war in Ukraine overshadowed signs of progress at the giant communications group. Tightening advertising budgets is an obvious place to start for consumer goods companies facing rapidly rising energy, wage and raw materials costs.
The share price fall that greeted full-year figures last month was WPP’s worst one-day decline in almost two years, a sharp reversal from previously steady gains. A disposal programme aimed at simplifying a bloated and unfocused operation, efforts to cut debt and tentative signs of improvement in revenue growth had helped to address the market discount attached to the conglomerate when compared with international peers such as Publicis and Interpublic.
A forward price/earnings multiple of 11 gives the owner of agencies such as Ogilvy, Hogarth and GroupM zero credit for the progress made over the past two years, but then investors have lots of bad memories of WPP. By the start of 2019, the shares had fallen by almost 60 per cent from an all-time high only two years earlier, with the acrimonious departure of Sir Martin Sorrell, WPP’s former boss and now head of S4 Capital, a rival, exacerbating the turmoil. More troubling still was anaemic revenue growth, high debt and a bloated structure.
External challenges stretch much further than the effects of the crisis in Ukraine. Read needs to convince investors that WPP can hold its own against rising competition from Facebook and Google, which have upended the advertising industry, and more companies taking their marketing operations in-house.
Hitting a target to bring revenue back to pre-pandemic levels a year earlier than expected lent some credibility to Read’s argument that WPP has the skills to capitalise on digital advertising, which has outpaced the recovery in more traditional marketing. Like-for-like revenue was 12.1 per cent ahead of 2020, but that shouldn’t come at the expense of progress this year, management reckons. It has set a sales growth target of 5 per cent, but has resisted calls to upgrade a 3 per cent to 4 per cent target for next year and beyond.
Roughly 2.5 per cent to 3.1 per cent of growth should be organic, with the rest bought in. The challenge for Read is to ensure he doesn’t repeat the mistakes of the past — a more pressing concern, given the racy valuations still attached to technology companies. Firms specialising in areas such as AI and data analytics are of most interest to the company. Annual acquisitions might number between ten and a dozen. At its height, WPP was making 50 deals or more a year.
The group has much more room to manoeuvre than in the past. Average net debt was £900 million last year, down from a peak of £5.1 billion in 2017, for a leverage ratio of 0.9 — well below a target range of 1.5 to 1.75. Acquisitions come third in its capital allocation priorities, after investing in existing agencies and paying out roughly 40 per cent of adjusted earnings via a dividend. Any cash left will help to buy back shares, pledged at £800 million this year.
The slimming-down is now largely complete. The hope is that a neater structure, a smaller property footprint and simpler IT systems will combine with better revenue growth to boost the operating margin back to the historical level of 15.5 per cent to 16 per cent from next year. Read’s pitch to investors might need some fine-tuning, but, at the present price, expectations look easy to surpass.
ADVICE Hold
WHY The risk of some belt-tightening among corporate clients looks adequately priced into the shares’ paltry valuation
CLS
For many London-listed office landlords, the question now is less when their rent collection levels will recover but to what extent they can claw back occupancy rates. Here, CLS has an advantage over some of its peers that are focused more on the nation’s capital.
Unlike most office landlords listed on the London market, CLS has an element of geographic diversity, which might be a strength. Greater undersupply before the pandemic and a less severe exodus from the workplace during Covid has meant that its German assets, comprising roughly 38 per cent of the portfolio by value, delivered the strongest valuation growth last year.
Take-up of new space within the City of London has been one of the weakest among all big European cities, according to Savills, the property services group, at 23 per cent below the five-year average last year. The fallback in leading German cities such as Berlin and Hamburg was much more muted, at just under 7 per cent.
The group-wide vacancy rate stood at 5.8 per cent at the end of December, down from 7.7 per cent at the end of June, as new lettings picked up during the final three months of the year, although the rate remains above the pre-pandemic level of 4 per cent.
While leases were signed and renewed at an average 0.4 per cent ahead of estimated rental values the year before, that compared with a 3.3 per cent rate secured in 2019. Rising inflation might provide one fillip to CLS’s rental income, given that more than 60 per cent of its leases are index-linked, including all those in Germany and France.
A more generous dividend also might be on the cards after the group converted to real estate investment trust status last year. Analysts at Berenberg, the investment bank, have forecast a step-up in the payment to 9.8p a share this year, which at the present share price would equate to a dividend yield of 4.7 per cent. CLS is not back to its pre-pandemic strength — but then neither is its share price. A 43 per cent discount to forecast net asset value at the end of this year, a metric that is expected to be ahead of last year, appears to be too harsh.
ADVICE Buy
WHY The shares’ discount versus net asset value looks overdone
