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A new chief executive could look to dampen expectations for earnings and the dividend

Now the dust has settled on the acrimonious exit of former WPP (WPP) chief executive Martin Sorrell it is a good time to assess the position the business finds itself in.

Despite recent weakness the shares are trading materially above the lows from earlier this year and we think it is time to sell. There looks to be a big risk of dividend disappointment, with an incoming CEO having every incentive to rebase expectations on earnings and the payout.

This undermines, in the short-term at least, our previously positive view on the stock, centred on its market leading position.

Whoever takes the top job on a permanent basis faces a big challenge. The consumer-focused firms for whom WPP works are scaling back expenditure and WPP has also recently lost several major clients.

Publicis has captured Proctor & Gamble’s media buying business in Australia and New Zealand; Vodafone (VOD) is moving some of its digital advertising function in-house; and Revlon’s media account has switched to IPG.

A trading update ahead of WPP’s AGM on 13 June provided some reassurance with April showing some improvement after a first quarter decline in like-for-like revenue of 0.1%. The company made no change to its guidance for flat revenue for 2018 as a whole.

Less positively the North American business, where the company has historically been most profitable, remains the weakest performing geographic segment.

And on a group financial basis, its net debt-to-earnings ratio at around two times is at the upper end of the targeted level.

Several names have been suggested by commentators as possible CEO candidates. Liberum analyst Ian Whittaker noted the Financial Times has flagged up candidates including Unilever’s (ULVR) marketing chief Keith Weed and ex-AOL chief executive Tim Armstrong.

‘We also think Jerry Buhlmann at Dentsu Aegis should be added to the list,’ Whittaker says. ‘However, we think there may be an argument for saying that WPP should go down the internal route to minimise the risk of disruption. In that case, Mark Read would appear the favoured candidate.’ Read is currently joint chief operating officer with Andrew Scott.

Meanwhile, recent reports suggest Sorrell has secured £100m in backing for new marketing venture S4 Capital. If correct, this is below the £150m the company stated it hoped to secure from institutional investors back in May.

S4 plans to reverse into Derriston Capital (DERR) in order to obtain a stock market listing.



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