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Progressive quarterly improvements

Dentsu Group 18 May 2021 Update
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Dentsu Group

Progressive quarterly improvements

Q1 update

Media

18 May 2021

Price

¥3,480

Market cap

¥980bn

Net debt (¥bn) at end Mar 21

169.4

Shares in issue

281.3m

Free float

76.7%

Code

4324

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.2

(7.6)

54.2

Rel (local)

5.6

(3.5)

19.3

52-week high/low

¥4,065

¥2,231

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

Interims

August 2021

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’s Q1 update shows a third successive quarter of improvement (a reducing decline in organic revenue), with Dentsu Japan down 0.9% on Q120 and Dentsu International 3.5% below prior year. Operating margins were considerably stronger in both segments as the transformation plan has kicked in. Q221 has started very strongly, and we leave our FY21 and FY22 revenue and margin estimates unchanged, but note that if trading continues to improve, there may be scope to move numbers later in the year, subject to the status of the planned Olympics. FY22 should be a stronger year of margin growth as permanent cost reductions contribute.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/19

939.4

101.3

271

95

12.8

2.7

12/20

835.0

123.5

250

71

13.9

2.0

12/21e

850.0

124.7

271

77

12.8

2.2

12/22e

900.0

149.7

337

100

10.3

2.9

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

Better prospects for Q221

Performance improved across the quarter, with March returning to organic growth, with a 2.5% increase. Q221 looks likely to be notably stronger, with April organic revenue growth at Dentsu International (DI) up 17%, albeit against weaker comparatives. Margin performance in Q1 was particularly strong: up 350bp to 32.8% at Dentsu Japan Network (DJN) and up 360bp to 10.3% for DI (at constant currency). For H221, the comparatives will be tougher (with H220 spending having been reined in) and much of this gain is likely to be whittled away. For FY21, guidance is for group margin to be broadly flat. Our modelling indicates 14.7% for normalised group operating profit to revenue less cost of sales, against 14.8% in FY20. Meaningful progress is more likely in FY22 as the permanent cost savings kick in and we are looking for an uplift at group level to 16.7%. Group targets are for DI to reach 15% and for DJN to post 20%. Progress on the transformation plan looks to be on track, with the planned share buyback on hold while the group engages in the possible sale and leaseback of the Shiodome head office building.

Olympic uncertainty

The big unknown currently is over the planned Tokyo Olympics, which our forecast assumes proceeds as planned. Management is sensibly withholding formal guidance until the interim results in August, by which time the die will be cast.

Valuation: FY22 discount to peers widened

The share price has drifted since February’s finals, reflecting uncertainty over the Olympics and relatively thin news flow. Looking out to FY22, we expect the benefits of restructuring and the impact of the simplification programme to be more pronounced. With a stronger share price performance by the peer group, the valuation gap has grown, with Dentsu trading at a 21% discount on EV/EBITDA and 29% on P/E. Given the anticipated margin expansion, we view this differential as overstated.

Comprehensive review remains on track

There has been progress across all four pillars of the comprehensive review during Q121, described in detail in our February initiation.

Simplification

DJN (46% of Q121 revenue less cost of sales) is being organised into four domains: Advertising Transformation (AX); Business Transformation (BX); Customer Experience Transformation (CX); and Digital Transformation (DX). Two of its largest agencies, Dentsu Digital and Dentsu Isobar, are being merged as of 1 July, bringing a creative angle to the digital mix as well as building scale. Dentsu Direct is another new entity, with the direct marketing and search specialists being brought together.

In DI, the ambitious programme to consolidate 160 brands down to six is well underway, with 56 agencies already brought together, ahead of plan. This has the potential to be both highly disruptive internally and unsettling to clients but looks to be being handled well. Master service set schedules have been drawn up to clarify centres of expertise and limit duplication of services, and client input has been an embedded part of the process. The largest combination to date has been Vizeum and iProspect, and there has been no client attrition as a result. At the end of the process, DI anticipates being the most integrated of the major global agency groups.

Lower operating expenses

There is no change to management guidance for annualised group cost savings of ¥75bn from FY22 (of which ¥50bn will fall into FY21). The associated cost in FY21 is guided to ¥56bn (also unchanged), with a further spend in DJN of ¥3bn the following year.

For DJN, the uplift to operating margins in Q121 was primarily from lower operating costs, ¥3.7bn lower than prior year, with a small contribution from the permanent cost reductions from the early retirement programme. As the market reopens, those variable costs would be expected to rise, across Q2-Q421, hence management guidance to broadly flat operating margin FY21 vs. FY20 (at constant currency).

At DI, progress has been good, with over half of planned cost savings already achieved, including renegotiating more than 50 property leases. Better use is being made of near-shoring and off-shoring opportunities, and further incremental gains are being made through automation, where appropriate.

Balance sheet efficiency

The group has disposed of two properties in Japan in Q121 for ¥30bn, but news is still awaited on the possible sale and leaseback of the head office building in Shiodome, which could be transformative for the balance sheet (press reports suggest it could be worth around ¥300bn ($2.7bn). Net debt at the quarter end was ¥169bn, up from ¥54bn at the year end, with working capital absorption (as would be expected) in the quarter.

Shareholder value

The ¥30bn share buyback, announced in February, has not been commenced due to the Shiodome potential disposal. Management has repeatedly referred to the potential for further returns following exceptional asset disposals. However, the commitment to growing the Customer Transformation and Technology proportion of the business towards the 50% target (from 29% in Q121) will require further investment in people and technology. Management targets a progressive dividend policy, with a pay-out ratio of 35% of basic EPS.

Exhibit 1: Financial summary

¥'m

2018

2019

2020

2021e

2022e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,018,512

1,047,881

939,243

955,045

1,010,768

Cost of Sales

(85,832)

(108,496)

(104,201)

(109,526)

(115,689)

Revenue less pass through costs

932,680

939,385

835,042

845,520

895,079

EBITDA

 

 

171,404

160,279

90,061

61,486

154,945

Normalised operating profit

 

 

153,229

140,751

123,979

125,000

150,000

Amortisation of acquired intangibles

(35,123)

(34,806)

(31,877)

(31,877)

(31,877)

Exceptionals

(2,149)

(99,733)

(229,629)

(54,500)

(3,000)

Share-based payments

(4,313)

(9,568)

(3,094)

0

0

Reported operating profit

111,638

(3,358)

(140,625)

(24,480)

68,979

Net Interest

(17,714)

(42,103)

(1,419)

(290)

(290)

Joint ventures & associates (post tax)

2,699

517

910

0

0

Exceptionals

52,128

2,175

0

0

0

Profit Before Tax (norm)

 

 

190,342

101,340

123,470

124,710

149,710

Profit Before Tax (reported)

 

 

148,751

(42,769)

(141,134)

(24,770)

68,689

Reported tax

(51,250)

(30,136)

(11,162)

8,917

(24,041)

Profit After Tax (norm)

107,321

86,653

78,177

79,814

97,312

Profit After Tax (reported)

97,501

(72,905)

(152,296)

(15,853)

44,648

Minority interests

(7,185)

(7,987)

(7,299)

(2,500)

(2,500)

Discontinued operations

0

0

0

0

0

Net income (normalised)

97,420

76,122

69,891

76,314

94,812

Net income (reported)

90,316

(80,892)

(159,595)

(18,353)

42,148

Basic average number of shares outstanding (m)

282

281

279

282

282

EPS - basic normalised (¥)

 

 

346

271

250

271

337

EPS - diluted normalised (¥)

 

 

346

271

249

269

335

EPS - basic reported (¥)

 

 

320

(288)

(571)

(65)

150

Dividend (¥)

90

95

71

77

100

Net revenue growth (%)

6.3

0.7

(11.1)

1.3

5.9

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

18.4

17.1

10.8

7.3

17.3

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

16.4

15.0

14.8

14.8

16.8

BALANCE SHEET

Fixed Assets

 

 

1,702,899

1,862,033

1,455,591

1,370,575

1,324,083

Intangible Assets

1,036,772

1,000,313

800,551

768,150

744,273

Tangible Assets

199,207

315,116

280,196

227,581

204,966

Investments & other

466,920

546,604

374,844

374,844

374,844

Current Assets

 

 

1,935,586

1,933,691

1,924,813

1,796,474

1,782,097

Stocks

28,580

21,007

23,848

25,067

26,477

Debtors

1,368,728

1,424,127

1,293,370

1,242,867

1,291,924

Cash & cash equivalents

416,668

414,055

530,692

451,639

386,794

Other

121,610

74,502

76,903

76,901

76,901

Current Liabilities

 

 

(1,785,608)

(1,859,224)

(1,759,071)

(1,648,153)

(1,596,568)

Creditors

(1,341,461)

(1,390,778)

(1,247,172)

(1,221,466)

(1,169,881)

Tax and social security

(42,981)

(17,689)

(71,228)

(71,228)

(71,228)

Short term borrowings

(104,879)

(184,816)

(72,533)

(72,533)

(72,533)

Other

(296,287)

(265,941)

(368,138)

(282,926)

(282,926)

Long Term Liabilities

 

 

(742,129)

(883,971)

(800,987)

(800,987)

(800,987)

Long term borrowings

(433,979)

(439,110)

(512,274)

(512,274)

(512,274)

Other long term liabilities

(308,150)

(444,861)

(288,713)

(288,713)

(288,713)

Net Assets

 

 

1,110,748

1,052,529

820,346

717,909

708,625

Minority interests

63,129

77,556

63,483

65,983

68,483

Shareholders' equity

 

 

1,173,877

1,130,085

883,829

783,892

777,108

CASH FLOW

Op Cash Flow before WC and tax

208,490

47,198

(55,166)

61,196

154,655

Working capital

7,866

(28,254)

(22,538)

23,578

(102,053)

Exceptional & other

(35,011)

148,452

213,845

290

3,290

Tax

(48,296)

(87,439)

(47,828)

8,627

(24,331)

Net operating cash flow

 

 

133,049

79,957

88,313

93,691

31,561

Capex

(31,322)

(31,000)

(19,948)

(21,474)

(21,474)

Acquisitions/disposals

(50,555)

(47,860)

(26,585)

(73,210)

(18,000)

Net interest

0

0

0

0

0

Equity financing

(12)

(20,008)

(10,004)

(30,000)

0

Dividends

(32,055)

(30,031)

(29,574)

(18,110)

(24,932)

Other

10,768

(35,674)

141,820

(29,950)

(32,000)

Net Cash Flow

29,873

(84,616)

144,022

(79,053)

(64,845)

Opening net debt/(cash)

 

 

154,752

122,190

209,870

54,115

133,168

FX

(18,281)

1,490

(12,071)

0

0

Other non-cash movements

20,970

(4,554)

23,804

0

0

Closing net debt/(cash)

 

 

122,190

209,870

54,115

133,168

198,013

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

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 £49,500 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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.

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

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

General disclaimer and copyright

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 £49,500 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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.

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

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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