Having previously been negative on the investment case for advertising giant WPP (WPP) we now feel the story has reached a turning point and it is time to buy again.

We could be wrong and this is certainly not a stock to buy if you are risk-averse. However, the company is in the early stages of a turnaround plan under chief executive Mark Read. Any signs of progress could see the shares re-rate from the current low rating of 8.5 times forecast earnings. WPP’s 10-year average forward PE is 12-times.

The pledge to maintain dividends at a base line of 60p means investors should be paid for their patience as they wait for WPP shares to recover – that level of payout implies a 7% yield.

Read was appointed in September 2018 as a permanent successor to founder Martin Sorrell, following the latter’s acrimonious departure six months earlier.

We think if there were any hidden nasties in the business then he would have found them by now. The threat of a dividend cut also looks somewhat reduced and the company has issued some fairly conservative guidance – most notably with a third quarter update in October.

Targets for Read’s turnaround of the group include £275m
of annualised cost savings, a margin of 15% and industry growth in line with peers by the end of 2021.

As Liberum analyst Ian Whittaker observes: ‘WPP itself said it had set targets it knew it could meet and that will raise the hopes more can be done.’

WPP has lots of moving parts, having made a series of bite-sized acquisitions in the last decade. The plan is to now simplify the business and integrate the large number of agencies operating under the WPP umbrella.

The group will have four new reporting segments. The first is Communications which is currently 75% of the business and encompasses the traditional work of an advertising agency.

The other areas are Experience, Commerce and Technology – these are priorities for expansion as reflected in management comments that they ‘already’ account for a quarter of revenue.

The sale of a large stake in its market research business Kantar, expected to fetch as much as £3bn, is another strategic
priority for the group and should help reduce borrowings and could also provide scope for a one-off capital return to shareholders.

The main risk investors have to weigh is the company’s exposure to an uncertain global economic backdrop, but we think the combination of a discounted valuation, lowly expectations
and a programme of self-help is a compelling one.

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