Source: Sharecast
The bank said it was downgrading the shares for two main reasons. Firstly, it thinks organic growth is likely to be below consensus and the sector in both 2024 and the medium term.
Secondly, it expects free cash flow to remain at depressed levels in 2024.
"We think this will limit the size of any share buyback programme with leverage (incl. leases) at 2.3x in 2024E," it said, adding that a large share buyback is only likely if we see asset disposals.
UBS said that in this regard, recent reports of a potential sale of WPP’s stake in Kantar are "helpful" but the timing remains uncertain.
The bank noted that while WPP trades at an attractive 8x estimated FY24 price-to-earnings, its 9% estimated free cash flow yield is broadly in line with peers.
In FY23, UBS expects WPP to deliver just £760m of free cash flow, down from £1.2bn in FY19. It said the issues have been reinvestment of cost savings, restructuring costs, working capital outflows, and high finance costs.
"Our concern is that many of these issues will remain in 2024," UBS said.
For 2024, it forecasts only around £700m of FCF.
"PP has targeted circa £300m of net cost savings, but we expect the CMD on 31 January to provide little reassurance that these will be delivered on time (by FY25E).
"We think EBIT margins will make limited progress in 2024 (UBSe flat, versus consensus +20bps) due to FX headwinds and negative operating leverage."
At 1055 GMT, shares in the advertising giant were down 3.1% at 736p.