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Guidance edged up

Dentsu Group 18 May 2022 Update
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Dentsu Group

Guidance edged up

Q122 results

Media

18 May 2022

Price

¥4,415

Market cap

¥1,215,751m

Net cash (¥bn) at end March 2022

36.7

Shares in issue

276.3m

Free float

77.8%

Code

DENN

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.4)

(9.6)

27.2

Rel (local)

(10.0)

(6.5)

28.1

52-week high/low

¥5,020

¥3,430

Business description

Dentsu Group is a holding company with two operational networks: Dentsu Japan Network and Dentsu International. Operating in over 145 countries, Dentsu Group provides a wide range of client-centric integrated communications, media and digital services.

Next events

Interim results

mid-August 2022

Q3 results

mid-November 2022

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Max Hayes

+44 (0)20 3077 5700

Dentsu Group is a research client of Edison Investment Research Limited

Dentsu has edged up its FY22 guidance for organic growth to a range of 4–5%, from 4% previously, following a strong Q122 performance, particularly at Dentsu International (DI). Customer Transformation & Technology (CT&T) continues to build, accounting for 31.5% of group net revenues in the period. Management remains confident of a good runway of growth. Group operating margin rose from 20.2% in Q121 to 21.2%, up 140bps at constant currency. FY22 guidance remains for a 17.7% operating margin, implying some circumspection on costs for the remainder of the year.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(
¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/20

835.0

123.5

249

71

17.7

1.6

12/21

976.6

146.0

389

118

11.3

2.7

12/22e

1,080.0

168.6

414

133

10.7

3.0

12/23e

1,123.0

176.6

445

149

9.9

3.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Good Q122 progress

Group net revenue grew from ¥222.5bn in Q121 to ¥258.9bn, with organic growth strongest in the Americas at +13.4%, where its performance in CXM (customer experience management) was particularly positive, up 27.7% year-on-year (+14.8% organic). Dentsu Japan Network (DJN) increased revenues by 10.0% organic, boosted particularly by progress in its digital activities, also reflected in the higher operating margin of 35.8% (Q121: 32.7%). Operating margins at DI dipped to 9.9% (Q121: 10.3%), but this includes the Russian operation (which is being transferred to local partners). Excluding Russia, which we estimate generated around ¥0.9bn in the quarter, DI’s net revenues would have been up 9.2%, rather than 8.4%, with an operating margin of 10.4%. Full year guidance on operating margin is held at 22.0% for DJN and 15.9% at DI. We have edged our FY22 net revenue forecast up from ¥1,059bn to ¥1,080bn, lifting our EPS forecast from ¥404 to ¥415.

Emphasis on Customer Transformation & Technology

Management remains confident on the prospects for CT&T, which should be much less exposed to any retrenchment of pure advertising budgets if global economies come under increasing pressure. In these circumstances, companies are more likely to need to accelerate digital transformation programmes. CT&T generates high-quality revenue, with more recurring income, a deeper reach into client budgets and the ability to manage costs through near- and off-shoring resourcing.

Valuation: Discount persists

While the other large marketing service companies have underperformed the market year-to-date, retrenching by 12% on average, Dentsu’s share price has increased by 6% over the same period. Nevertheless, across FY21–23e, the shares still sit at a substantial valuation discount to the peer set of 25% on EV/EBITDA and 9% on P/E. Given the improving quality of business with more emphasis on digital transformation, we still believe this differential is overstated.

Estimates again edged ahead

Having edged our numbers up with the full year report in February, we now do so again, buoyed by the good performance in Q122. The revisions, though, are modest and assume that like-for-like net revenue growth across Q222–Q422 will be less than that achieved for Q122 given the much tougher comparatives through the remainder of the year. This is especially the case in Q322 in DJN, where the comparison period encompassed the Tokyo Olympics. The group has changed the terminology for its main revenue metric from ‘Revenue less cost of sales’ to the simpler ‘Net revenue’, with no change to the underlying numbers.

Exhibit 1: Summary revisions to numbers

Net revenue (¥bn)

Underlying operating profit (¥bn)

EPS (¥)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2022e

1,059.2

1,080.0

+2

187.9

191.2

+2

404

414

+3

2023e

1,102.2

1,123.0

+2

195.2

198.6

+2

423

445

+5

Source: Edison Investment Research

DJN trading and outlook (46% group net revenue)

CT&T increased to 25.8% of segmental net revenue, up from 23.7% in Q121. The segment delivered strongly across its digital activities, with iSiD delivering 17.7% organic growth, the newly consolidated Septeni growing almost 14% in Q1 and recently acquired Ignition Point (a CT&T consultancy) showing annual growth of 30%, all boosting DJN’s positioning as the leader in digital advertising in the Japanese market. There is still progress in the more traditional areas, with TV advertising up by 4.7%. Finance/insurance and healthcare were the strongest client segments, up 36.7% and 40.6%, respectively, while tech, food and beverage and autos (between them 65% of DJN net revenue) were all behind net revenue levels in Q121.

Management guidance remains for full year net revenue growth of 2–3%.

The operating margin increased to 35.8%, up 310bps from Q121. However, management highlights that costs are likely to rise across the rest of the year, which is implicit in the maintained full year guidance for an operating margin of 22%. The simplification of the business continues, with the emphasis on hiring to support the growth in CT&T.

DI trading and outlook (54% group net revenue)

Total net revenue was up by 8.4%, a figure that would have been higher but for the Russian contribution, which we calculate to have been around ¥0.9bn. Stripping this out, net revenues were 9.2% ahead. The strongest growth was within CXM, up by 14.8%, taking the CT&T contribution to 36.4% of the segment, up from 33.6% in Q121. Media net revenues were up 6.4% (led by the performance in the Americas), while Creative net revenues managed to move ahead by 1.4%, with some indication of expanding remits from existing clients. Organic growth in the Americas reporting region was 13.4%, with EMEA at 3.3% and Asia-Pacific at 5.2%. Within EMEA, Denmark and the UK both increased net revenue by double figures, with the performance in Australia within Asia-Pacific also over 10%. Russian revenues were down over 10%.

The strongest sector was again finance/insurance at +47.3%, with food services, transportation, apparel and ‘other’ all growing in excess of 30%. Food and beverage, autos and distribution (37% of DI net revenue) were down on the prior year at constant currency.

Momentum continues to be good in the CT&T, with volumes running 18% above pre-pandemic levels. Across DI the pipeline is reportedly currently standing at around $5bn, of which 70% is offensive (ie not with existing clients), with both the pipeline and the value of average pitches all ahead. Much of the pitch activity is at a local or regional level, rather than the largest global accounts, so tends to be less picked up by the regular industry surveys of net gains and losses. The conversion rate on these pitches is running at around 70%, while the cost of pitching will also be lower than that required for much larger pieces of business.

DI grew its business with its 10 largest clients by 15% in Q122, which supports the broader strategy of preferring a ‘land-and-expand’ approach.

Along with the structural impetus behind CT&T, these factors have given management the confidence to lift the guidance for DI’s net revenue growth from the 4–5% cited in February by 100bps to 5–6%, even though prospects for the consumer economy over the remainder of the year have dampened.

DI’s operating margin slipped slightly in Q122 to 9.9% (Q121: 10.3%), but this was affected by the Russian operations, without which it would have been 10.4%. Guidance for the full year is maintained for an operating margin of 15.9%, flat over the prior year. Management is confident that the structural improvements in the business as CT&T grows, continued rightsizing and near- and off-shoring of resource will help it meet this target.

M&A, buybacks set to continue

With a maintained target of a mid-term range for net debt/EBITDA of 1.0–1.5x, there is plenty of scope for continued M&A activity to drive the CT&T contribution up towards the 50% level ‘over time’, despite a progressive dividend policy (35% payout by FY24) and share buybacks. By the end of April, Dentsu Group had bought back 2.83m shares, spending ¥13bn of the ¥40bn indicated for the programme.

The M&A market is clearly competitive, and management is not afraid to walk away from deals where the economics do not stack up. Within Japan, DJN has a clear advantage, being an incumbent of scale and with over 6k clients as potential referral partners. Management reports that the M&A pipeline remains strong.

Net cash at end Q122 was ¥36.7bn, down from ¥144.4bn at the FY21 year-end (prior to paying for the latest acquisitions of IgnitionPoint – purchase price undisclosed).

Valuation: Discount to peers despite outperformance

Exhibit 2: Valuation of global major marketing service companies

 

Market
cap

Share price change ytd

EV/sales (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

Company

(US$m)

(%)

CY21

CY21

CY22

CY23

CY21

CY22

CY23

(%)

Omnicom

16,343

1

1.3

8.3

7.6

7.2

11.8

11.7

10.9

3.6

WPP

13,274

-13

1.1

8.1

7.0

6.4

18.6

10.9

9.7

3.1

Interpublic

12,896

-15

1.4

8.7

7.4

7.0

13.0

11.8

11.1

3.6

Publicis

14,453

-5

1.4

7.1

6.5

6.3

13.6

10.1

9.7

4.3

Hakuhodo

4,127

-30

0.5

5.2

5.9

5.8

9.3

14.8

13.1

2.3

Peer average

 

-12

1.2

7.5

6.8

6.5

13.3

11.9

10.9

3.4

Dentsu

9,401

6

1.0

5.5

5.2

5.0

11.3

10.7

9.9

2.7

Premium/(discount)

 

19%

-15%

-26%

-24%

-24%

-15%

-10%

-9%

-22%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 17 May 2022.

The better share price performance compared to peers has narrowed the valuation gap slightly from 29% to 24% on EV/EBITDA since our February report. On a P/E basis, the valuation is closer to the peer set.

Exhibit 3: Financial summary

¥m

2020

2021

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

939,243

1,085,592

1,225,000

1,275,000

Cost of Sales

(104,201)

(109,015)

(145,000)

(152,045)

Net revenue

835,042

976,577

1,080,000

1,122,955

EBITDA

 

 

90,063

195,006

207,128

214,528

Operating profit (before amort. and excepts.)

 

 

123,979

179,028

191,150

198,550

Amortisation of acquired intangibles

(31,877)

(29,409)

(31,379)

(31,379)

Exceptionals

(229,631)

94,368

0

0

Share-based payments

(3,094)

0

0

0

Reported operating profit

(140,625)

241,841

159,771

167,171

Net Interest

(1,419)

(35,491)

(32,716)

(32,351)

Joint ventures & associates (post tax)

910

2,484

10,200

10,404

Exceptionals

0

0

0

0

Profit Before Tax (norm)

 

 

123,470

146,021

168,635

176,604

Profit Before Tax (reported)

 

 

(141,134)

208,834

137,255

145,224

Reported tax

(11,162)

(93,979)

(35,365)

(47,343)

Profit After Tax (norm)

78,177

116,256

120,092

123,623

Profit After Tax (reported)

(152,296)

114,855

101,890

97,881

Minority interests

(7,299)

(6,463)

(6,605)

(6,799)

Discontinued operations

0

0

0

0

Net income (normalised)

69,891

109,205

111,744

116,823

Net income (reported)

(159,595)

108,392

95,285

91,082

Average Number of Shares Outstanding (m)

279

279

268

261

EPS - normalised (sen)

 

 

250

392

416

448

EPS - normalised fully diluted (sen)

 

 

249

389

414

445

EPS - basic reported (¥)

 

 

(571)

389

355

349

Dividend (¥)

71

118

133

149

Net revenue growth (%)

16.9

10.6

4.0

EBITDA Margin to revenue less pass-through costs (%)

10.8

20.0

19.2

19.1

Normalised operating margin to revenue less pass-through costs (%)

14.8

18.3

17.7

17.7

BALANCE SHEET

Fixed Assets

 

 

1,439,542

1,305,203

1,315,971

1,323,739

Intangible Assets

784,502

858,748

874,254

886,760

Tangible Assets

280,196

88,682

83,944

79,206

Investments & other

374,844

357,773

357,773

357,773

Current Assets

 

 

1,924,816

2,214,088

2,411,823

2,526,492

Stocks

23,848

26,880

35,753

39,505

Debtors

1,293,370

1,386,767

1,564,851

1,628,723

Cash & cash equivalents

530,692

723,541

734,320

781,365

Other

76,906

76,899

76,899

76,899

Current Liabilities

 

 

(1,759,071)

(1,883,417)

(2,064,838)

(2,129,907)

Creditors

(1,247,172)

(1,412,757)

(1,594,178)

(1,659,247)

Tax and social security

(71,228)

(71,228)

(71,228)

(71,228)

Short term borrowings

(72,533)

(72,533)

(72,533)

(72,533)

Other

(368,138)

(326,899)

(326,899)

(326,899)

Long Term Liabilities

 

 

(800,985)

(726,400)

(720,783)

(715,166)

Long term borrowings

(512,274)

(506,657)

(501,040)

(495,423)

Other long term liabilities

(288,711)

(219,743)

(219,743)

(219,743)

Net Assets

 

 

804,302

909,474

942,173

1,005,158

Minority interests

(63,483)

(64,440)

(71,045)

(77,844)

Shareholders' equity

 

 

740,819

845,034

871,128

927,314

CASH FLOW

Operating Cash Flow

(55,166)

254,221

184,613

192,582

Working capital

(22,538)

69,155

(5,536)

(2,555)

Exceptional & other

213,845

(59,307)

3,307

2,942

Tax

(47,828)

(149,880)

(68,081)

(79,694)

Net operating cash flow

 

 

88,313

114,189

114,303

113,275

Capex

(19,948)

305,200

1,322

(8,746)

Acquisitions/disposals

(26,585)

(49,672)

(13,725)

(15,000)

Net interest

0

0

0

0

Equity financing

(10,004)

(30,010)

(40,000)

0

Dividends

(29,574)

(23,473)

(33,569)

(36,867)

Other

141,820

(108,773)

(11,935)

0

Net Cash Flow

144,022

207,461

16,396

52,662

Opening net debt/(cash)

 

 

209,870

54,115

(144,351)

(160,747)

FX

(12,071)

(8,995)

0

0

Other non-cash movements

23,804

0

0

0

Closing net debt/(cash)

 

 

54,115

(144,351)

(160,747)

(213,409)

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Dentsu Group and prepared and issued by Edison, in consideration of a fee payable by Dentsu Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by Dentsu Group and prepared and issued by Edison, in consideration of a fee payable by Dentsu Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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