WPP reports 47% fall in pre-tax profits
Sir Martin Sorrell’s WPP Group has reported a 47% fall in pre-tax profits to £252.2 million in the first half of 2009.
Operating profit at the company – the world’s largest advertising group by revenue – was down by 24.5% to £342.2 million, with like-for-like sales down 8.3%.
This compares with a first half fall in like-for-like sales of 8.8% for US firm Omnicom and a second quarter fall fall of 8.6% for French group Publicis.
WPP’s gross margin was down 7.8%, or 9.6% excluding redundancy costs, with reported earnings before interest, depreciation and amortisation down 14.3% to £455 million.
However, billings were up 11.1% to £18.7 billion while reported revenue increased 28.4% to £4.3 billion.
Sorrell said: “Things have been very, very tough and I cannot remember seeing worse.
“But Armageddon or Apocalypse has been averted. July for us has been less worse and we are not expecting to see further declines.”
Commenting on the results, RBS analyst Paraag Amin said: “Whilst it was broadly expected that WPP’s interim results would be grim (deteriorating revenue growth, little improvement in outlook, and ongoing concerns about the balance sheet), in the medium-term the outlook appears to be brightening, as several large advertisers said at their interim results that they would increase advertising spend as they seek to drive volumes in the second half of the year.
“However, the key question will be whether the increase in spend is due to discounting (which I fear) or if it is a real increase in spend on a like-for-like basis. If the latter is true, then we should see operational leverage and the stock will look attractive on any drop today on a mid to long-term basis. If it is the former, we could continue to see margins depressed in the near-term and therefore one may choose to adopt a ‘wait and see’ policy before buying into a longer term recovery.
“The other area of concern remains the likely downgrade to junk of WPP’s credit rating, but on the call management stated the cost of this would be 50bps or $3 million.
“On estimates – it looks like ’09 earnings numbers will come down 5-10% towards 40p (due to 1H miss), which will then leave 2010 earnings flat yoy (if people leave unchanged). Key questions for investment case will be 1) whether they’re downgraded to junk (rights issue possible?) and 2) whether margins can turn up in 2H – which might be tough if ad spend is driven by volume rather than price.
“However they will see some operational leverage in long term and are structurally still a good business, but some may choose to adopt a ‘wait and see’ policy with near term uncertainty.”