Advertising WPP PLC (LON:WPP) shares jumped on Friday as its 2018 profits sank but its guidance for the new fiscal year was better than analysts had expected.
Profit before tax sank 30.6% to £1.5bn last year on revenue of £15.6bn, down 1.3% on a reported basis or up 1.5% at constant exchange rates. On a like-for-like basis, revenue increased by 0.8%.
READ: WPP shares jump as new boss unveils fresh strategy to turn around business
Like-for-like revenue less pass-through costs dropped 0.4%, better than the company’s guidance for a 0.5% to 1.0% fall.
Reported billings grew by 0.4%, or 3.3% at constant currency, to £55.8bn with like-for-like growth of 3.2%.
Like the rest of the traditional advertising sector, WPP has come under pressure from online competition and weaker business confidence amid Brexit uncertainty, a US-China trade dispute and concerns about a global economic slowdown.
New strategy under new CEO
WPP chief executive Mark Read, who took over the reins after founder and former boss Martin Sorrell left last April after allegations of personal misconduct, has been carrying out his new strategy to turn around the business.
His plan includes reducing the number of agencies WPP runs with the aim of saving £275mln by 2021.
The company took a £234mln charge for the restructuring in the fourth quarter of 2018, which carved into profits. The headline operating margin edged down 1.1 points to 15.3%, reflecting severance restructuring costs.
"Since September, we have made good progress in implementing the new strategy for WPP. We have set out our vision for a more client-centric WPP, simplified our offer through the creation of two new integrated networks, VMLY&R and Wunderman Thompson, realigned our US healthcare agencies with major networks, formed the company's first executive committee and begun the process of seeking a financial and strategic partner for Kantar,” Read said.
“Through 36 disposals since April 2018, we have strengthened our balance sheet and streamlined our business, raising £849mln of cash proceeds in 2018.”
WPP declared a dividend of 60p per share, in line with last year’s payout.
WPP expects challenging 2019 after client losses
For 2019, the company expects like-for-like revenue less pass-through costs to fall by 1.5% to 2%.
The headline operating margin to revenue less pass-through costs are forecast to decline 1 point on a constant currency basis.
"As we have said previously, 2019 will be challenging - particularly in the first half - due to headwinds from client losses in 2018,” Read said.
“However, we start the year with fewer clients under review than we did in 2018, and investments in creativity and technology will further improve the competitiveness of our offer.”
Liberum analysts said the 2019 guidance was not as bad as expected. The broker maintained a 'buy' rating and target price of 1,290p.
"2018 results were slightly better than expected but the focus was always going to be on what WPP said on 2019 and there the commentary was more positive than would have been expected," it said.
"While the FY19E revenue guidance is in line with expectations, WPP's margins should hold up better than we would have thought. With the shares at <9x adjusted PE, we see considerable scope for a re-rating."
Stronger momentum in Europe and emerging markets
Read said the business was performing strongly in Western Continental Europe, Asia Pacific, Latin America, Africa and the Middle East as well as Central and Eastern Europe. The group is addressing its weaker performance in the US.
George Salmon, equity analyst at Hargreaves Lansdown, said stronger momentum in Europe and emerging markets provides "some welcome relief after a torrid 2018".
"WPP is undergoing a transformation that’ll hopefully see it shed significant levels of debt, and dispose of several non-core divisions, meaning it emerges as a simpler business with a stronger balance sheet," he said.
"Holding the dividend at 60p during the next few years would mean investors get a handsome yield while they wait, but markets are tough at the moment and turning around a supertanker like WPP takes time.
"The light at the end of the tunnel is getting nearer, but with 2019 set to be impacted by continued weakness in the key US market, revenue and margin trends could well get worse before they get better.”
In late morning trading, shares gained 7.9% to 891p.