WPP shrugs off election warning

Strong currency headwinds continued to impact WPP in 2014, but another decent set of full-year results has nudged shares in the advertising giant to an all-time high. The shift higher also came despite the PR firm flagging up ongoing uncertainties around the UK General Election, which could impede economic recovery.

Revenue rose by 5% to £11.5 billion, or by 10% both in dollar and euro terms. Strip out the foreign exchange hit and constant currency revenue grew by 11%, or 8.2% like-for-like. Net sales were a fraction lower on a reported basis at £10.1 billion, or up 6.6% at constant currency.

However, net sales margin edged up to 16.7% which, in a year of ramping up earnings guidance, helped generate headline pre-tax profit of over £1.5 billion for the first time, up 3.7%, or 11.6% at flat FX. That gives fully diluted adjusted EPS of 84.9p. True, growth did slow in some of WPP’s new markets, but both the US and UK did well.

There’ll be further share buy-backs in 2015, too. WPP will aim to buy back up to 3% of its current issued share capital, which would boost headline EPS by 0.2 margin points. A final dividend of 26.58p takes the full year total to 38.2p, up 12%. This takes its pay-out ratio - the proportion of its earnings paid out as dividends - to the target of 45% a year ahead of schedule. With a strong pipeline of M&A opportunities, £300-400 million has been earmarked for acquisitions, excluding bigger "one-offs".

So far this year, trading is going nicely. January's like-for-like revenue was up 7% and net sales rose 4%, with growth seen everywhere save Latin America. But chief executive Sir Martin Sorrell reiterated that five "grey swans" - known-unknowns - are casting a slight gloom on WPP’s markets. These are eurozone fragility; the Middle East; Brazil, Russia, India and China (BRICs) and the Next 11 (emerging economies); the impact of the US Federal Reserve's tapering of quantitative easing; the UK General Election on 6 May.

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"If the Conservatives win outright (unlikely?) or lead a coalition or even form a minority government, there will be a Referendum on the EU in 2016 or 2017, which will cause significant uncertainty," Sorrell explained. "If Labour wins outright (also unlikely?), or leads a coalition (more likely with the SNP?) or forms a minority government, it will win partly on a "bashing business" manifesto, which may resonate at the ballot box. All seems a case of "Morton's Fork". Either way, the United Kingdom economy may slip into the political cycle again, with austerity in the early part of the five year cycle to deal with the continuing Budget deficit and better times around the next election in five years' time (or earlier?)."

The City expects growth in like-for-like revenue of more than 3% in 2015, with margin about 0.3 percentage points higher at constant currency. Investec Securities expects double digit EPS growth for at least the next two years.

Westhouse Securities analyst Roddy Davidson remains upbeat: "We retain our positive view on the group’s trading prospects, its status as a beneficiary of US$ strength, its ability to capitalise on a positive cyclical and structural outlook for global advertising spend, and the desirability of its overweight exposure (relative to peers) in digital disciplines and emerging territories.”

He adds: "We see scope to upgrade our forecasts and will revert following this morning’s results meeting, but in the meantime believe the group’s valuation (16.6x and 11.0x FY2015E P/E and EV/EBITDA multiples respectively, 2.7% yield – based on current forecasts) offers further share price upside potential and maintain our Add recommendation."

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