As spin goes, last year’s trading figures provided plenty of material for the WPP boss, Mark Read, to choose from. But the headline? Organic revenue growth of 6.9 per cent came in ahead of the market’s expectations and at the top end of the range flagged in October. That’s even after said guidance was raised three times.
Progress in pushing the top line forward will be slower this year, the result of some punchy annual comparisons at the start of last year, as well as a tough macroeconomic backdrop. Underlying revenue is expected to come in at between 3 per cent and 5 per cent this year, but that is strikingly better than a gloomy consensus forecast for a decline of 1 per cent that analysts had pencilled in at the end of last year.
The flip in WPP’s top line has been stark. Last year’s organic revenue growth was the third consecutive rise, after four years of decline. It was the product of a real rise in demand, too. Putting up prices might have contributed 3 per cent of the increase, but about 4 per cent was down to a rise in the volume of work. Not surprisingly, digital advertising posted the best gains, an area that WPP has feverishly — and belatedly — pushed more of the business towards over the past few years.
As for WPP’s own cost inflation, it should be a “a little less intense” this year, Read reckons. If it can continue to squeeze more costs out of the business then the adjusted operating margin will increase again to 15 per cent, management reckons. An annual dividend of 39.4p a share was a rise of almost 50 per cent on 2021. Analysts forecast a more meagre rise in next year’s payment, to 39.66p, still leaving the shares offering a decent potential yield of 3.8 per cent at the current share price.
The rebuild isn’t done yet. The shares are still priced 17 per cent lower than when Read took the top job from Sir Martin Sorrell, the advertising giant’s founder and now head of rival S4 Capital, who headed for the exit in 2018. Investors probably have one eye on the past: anaemic revenue growth, high debt and a bloated structure.
Work on sorting the latter two problems looks largely complete. Net debt stands at £2.5 billion, which represents a leverage ratio of 1.5, at the bottom-end of a range that stretches to 1.7. That is way below the £4 billion, or 2.1, the group was saddled with in 2018. Many disposals have been made under Read’s watch, including a 60 per cent stake in the market research business Kantar and the advertising platform AppNexus.
There are no plans to markedly reshape the group or go on a spending spree, even if it does now have more room for dealmaking. 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.
If Read and co can deliver on organic revenue guidance for this year it could win over the market and close the discount baked into WPP’s shares versus international peers like Publicis and Interpublic. The stock trades at almost 10 times forward earnings, compared with a multiple of just over 11 for the former and almost 13 for the latter, which is also a discount to its own long-running average.
All said, advertising groups have derated since the start of last year. That is hardly surprising. About 19 per cent of business for WPP’s agencies comes from technology clients, a sector enduring its first major test in a decade. Another 24 per cent comes via those selling consumer packaged goods. There is room for both income streams to be tested this year as companies tighten marketing budgets.
Cyclical risk is unavoidable, but WPP is making the right strategic moves.
ADVICE Buy
WHY There could be room for more revenue upgrades this year if resilience continues
Hays
Want to know how recruiters see the road ahead for global economies? Take a look at their own hiring levels. Hays has halted its headcount growth after a rush in taking on new consultants amid the post-pandemic recovery in the labour market.
The FTSE 250 recruitment group is riding the wage inflation wave, a by-product of skill shortages in some industries such as engineering. Fee income, a measure of profitability, rose 12 per cent on an underlying basis over the first half of its financial year. Recruiters are natural beneficiaries of rising wages, with Hays taking a percentage of a permanent hire’s first-year salary and a cut of a contract worker’s overall pay. A rise in its own wage bill caused operating profit to fall by 5 per cent over the period.
Beneath higher wages are signs that employer confidence is waning. The volume of permanent hires was down 1 per cent over the first half of the year, as employers have delayed taking on more staff. Temporary recruitment was down by the same proportion year-on-year, even if there was some sequential improvement as the months drew on. The question is how long wage inflation continues to offset weaker hiring activity.
Some factors might prove helpful in the face of the downturn. The recruiter is generating less of its revenue from industries that stand to be hurt the most from a dive in the economy. Construction and property hiring accounts for about 11 per cent of fee income, compared with 24 per cent during the 2008 financial crisis, as the brokerage Jefferies points out, while banking and finance is 4 per cent, versus 10 per cent 15 years ago.
Hays is still more highly valued than its UK-listed rivals PageGroup and Robert Walters. Scale should command a higher price and Hays has that over its rivals. It also has a higher bias towards temporary rather than permanent recruitment, the preferred option for employers in times of economic uncertainty. But it isn’t cheap by historical standards. The shares trade at 15 times forward earnings, smack in line with the ten-year average. Is that justified on the verge of global recessions? It leaves room for disappointment.
ADVICE Avoid
WHY Scope for the shares to devalue in face of recession
in its biggest markets
