May 23, 2017 / 3:27 PM / 2 months ago

Fitch Affirms WPP at 'BBB+'; Outlook Stable

16 Min Read

(The following statement was released by the rating agency) LONDON, May 23 (Fitch) Fitch Ratings has affirmed UK-based WPP Plc's Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The Outlook is Stable. A full list of ratings actions is below. The ratings reflect the leading market position of WPP within the marketing communications services sector and its effective scale and diversification across geographies, products and customer market sectors. The ratings are supported by significant discretion in managing the company's capital structure that results from a strong cash-generative business model and by retained flexibility in the company's financial policies. These are elements that are equally key to maintaining competitive capability, investing for growth and addressing changes in the industry environment. Fitch expects that leverage will increase marginally in 2017 but remain consistent with a 'BBB+' rating, albeit with limited headroom. KEY RATING DRIVERS Diversified and Holistic Portfolio: WPP has a strong portfolio of advertising, measurement, market research, PR and brand management businesses. The portfolio covers most elements of the marketing communications services sector and enables the company to provide holistic solutions to its clients. WPP's revenues are equally well diversified from a geographic and end-customer segment perspective. Fitch views the diversification as credit- supportive as it enables data and technology expertise to be leveraged from one market to another, the targeting of global clients and reduces risks related to the company's cyclical exposure. Potentially Slower Growth Trends: WPP's net sales growth of 3% over the past three years on an organic basis could slow. This reflects a combination of increasing competition and pricing pressure in the sector, potentially reducing spend at FMCG clients and greater cost pressures at some of WPP's large established customers who are facing a macro environment of low growth and low inflation. Recent loss of contracts at AT&T and VW exemplify some of the pressures. We expect WPP to take a balanced approach on the trade-offs between profitability and revenue. In the medium-term the competitive sector backdrop could lead to further industry consolidation. Sustaining its Competitive Position: We believe WPP's focus on portfolio integration, scale, ability to provide holistic products and services and investment capacity for data, technology and content are key to sustaining the company's competitive position. These elements take time to yield a sustainable positive effect on financial performance. They enable WPP to offer greater value to customers, reduce costs and absorb pricing pressure. WPP aims to improve its net sales profit margin by 2 pp to 19.7% in the long run. This includes 1% margin improvement as a result of operational efficiency programmes. Capital Structure Discretion: We expect WPP to manage leverage at a level corresponding to funds from operations (FFO) adjusted net leverage (based on average net debt) of around 3.6x. This leaves limited headroom in its 'BBB+' rating. The company however, retains significant financial flexibility as a result of its strong cash generation and financial policy. Fitch estimates that WPP is likely to be able to generate GBP1.4 billion-1.5 billion of pre-dividend free cash flow (FCF) annually over the next three years, assuming no significant macro-economic downturns. Combined with a dividend pay-out ratio of 50%, WPP retains capacity for investments and managing its credit profile. Exposure to Macro-Cyclicality: WPP's revenues are driven by the marketing spend of corporates, which can fluctuate depending on business and economic cycles. This exposure constrains ratings in the sector. WPP's geographic, product and end customer diversification helps to reduce these risks. In addition, 8% of costs in relation to net sales are variable staff costs, which can be reduced if needed. In periods of sustained economic downturns, WPP may also be able to gradually downsize some of its operating leases, which are primarily linked to property rental. FX Exposure: We expect WPP's results to be positively impacted by FX in 2017 but to a lower extent compared with 2016. WPP's emerging markets operations earn a higher margin than operations in more developed countries. WPP funds itself with USD, GBP and euro-denominated debt. While dollar, euro and sterling debt are largely matched by revenue generation in the US, Europe and the UK, the company is exposed to a modest currency mismatch in emerging markets. Around 30% of 2016 revenue was generated in APAC, LATAM, CEE and MEA regions. These regions are funded by euro-denominated debt. Sector Opportunities and Threats: Sector trends and rapid evolution will continue to create uncertainties. These include the growing dominance and disintermediation from the likes of Facebook, Google and Amazon, the entry of consultancies and technology companies, the increasing importance of data analysis and expansion of new digital and media. We believe these trends present both opportunities and threats for WPP. Its business model is not affected by the type of media advertising. In our opinion, WPP's success will be driven by the company's ability to add value to its clients, with scale and FCF generation being key to this. DERIVATION SUMMARY WPP's rating is driven by the company's scale and leading market position in the global marketing communications sector, strong cash generative capability and retained financial flexibility to manage cyclical downturns, operational pressure and invest in growth opportunities. Compared with other sub-segments of the media sector, revenue from market communications are less exposed to a shift in digital distribution and advertising. These are factors that are also reflected in the rating of sub-segment peer The Interpublic Group of Companies, Inc. (BBB/Positive). Among Fitch-rated European TMT companies, WPP has one of the best net debt to cash flow from operations minus capex ratios in the sector around 3.5x (based on average net debt). This is comparable to other media sector peers with leading market positions such as RELX (3.6x to 3.7x, BBB+/Stable) and Bertelsmann (2.5x-3.0x, BBB+/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 7% in 2017, partially driven by FX, reducing to 3% in FY18 and 2.5% per annum thereafter - Operating margins to expand by 20-30bp per year over the next three years. - Capex of around 2.5% per year. - Share buybacks of 2%-3% of share capital per year. - A net income dividend pay-out ratio of 50%. - Leverage managed within the company's target of 1.5x to 2x average net debt-to-EBITDA. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Notwithstanding a strong industry position, diversification and a flexible cost base, the company's financial policy of balancing the need to invest in acquisitions, a progressive distribution policy and a measured leverage profile - are likely to constrain the ratings; Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Events leading to average net debt/EBITDA trending consistently and materially above 2x. - FFO adjusted net leverage (calculated using average net debt) remaining sustainably above 3.7x and pre-dividend FCF margin remaining consistently below 7%. - A weakened operating profile or a change in financial policy, more so than M&A or cyclically driven trends. LIQUIDITY WPP has a strong liquidity profile. The company is expected to generate positive FCF over the next 12 months; while an undrawn USD2,500 million revolving credit facility due 2021 provides further liquidity. FULL LIST OF RATING ACTIONS WPP Plc -- Long-term IDR: affirmed at 'BBB+', Outlook Stable -- Senior unsecured rating: affirmed at 'BBB+' WPP Finance S.A -- Senior unsecured rating: affirmed at 'BBB+' WPP Finance 2010 -- Senior unsecured rating: affirmed at 'BBB+' WPP Finance 2013 -- Senior unsecured rating: affirmed at 'BBB+' WPP Finance Deutschland GmbH -- Senior unsecured rating: affirmed at 'BBB+' Contact: Principal Analyst James Hollamby Associate Director +44 20 3530 1656 Supervisory Analyst Tajesh Tailor Senior Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Nikolai Lukashevich, CFA Senior Director +7 495 956 9968 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below