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Strong Q3 lifts full-year guidance further

Dentsu Group 16 November 2021 Update
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Dentsu Group

Strong Q3 lifts full-year guidance further

Q321 results

Media

16 November 2021

Price

¥4145

Market cap

¥1,144bn

Net cash (¥bn) at end September 2021

13.1

Shares in issue

275.9m

Free float

74%

Code

DENN

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.1)

(1.0)

32.9

Rel (local)

(5.2)

(5.4)

10.5

52-week high/low

¥4,420

¥2,919

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

FY21 results

February 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 posted a very strong performance for Q321, with revenue less cost of sales (RLCoS) up 27.8% on an organic basis and a substantial uplift in operating margin to 23.5%, from 12.2% in Q221. Full-year guidance is raised, having been lifted in August, with an indication of a FY21 margin of 18.0% after greater intended investment in Q4. Proposed board changes for the new year split the chairman and CEO roles, with the existing CEO retiring and appointments of independent non-executives planned. The better performance and balance sheet strength support an uplift in DPS, with ¥113.5 now expected for the full year (previously ¥101).

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(
¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/19

939.4

101.3

271

95

15.3

2.3

12/20

835.0

123.5

250

71

16.7

1.7

12/21e

966.9

135.2

378

114

11.0

2.8

12/22e

1000.0

140.5

385

121

10.8

2.9

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

Japan and digital lead the way in Q3

Q321 organic growth at Dentsu Japan Network (DJN) was exceptionally strong, up 49.7%. While the Olympics/Paralympics were only mentioned in passing in the release, it seems reasonable to assume they were a significant factor in driving the quarterly performance across traditional and digital media. Over 9M21, Customer Transformation and Technology, the heart of the transformation plan, reached 23.2% of DJN RLCoS. At Dentsu International (DI), the proportion is higher at 32.9%. The medium-term target is for the proportion to reach 50% at a group level. Organic growth at DI in Q321 was 13.4%, with an operating margin of 16.2%. We have adjusted our FY21 forecasts to reflect the updated guidance. For FY22, we have edged our revenue ahead but marginally increased our assumptions on costs.

Transforming the balance sheet

The sale of the Shiodome Head Office building on the last day of the quarter (price undisclosed but reportedly around ¥300bn) boosted operating profit by ¥87.0bn and net profit by ¥49.0bn, with a slightly higher tax cost than expected. The group’s cash position is also helped by the costs of transformation being lower than had been anticipated, with net cash of ¥13.1bn at end September. This supports the investment being made in transforming the business and the continuing M&A programme and the share buyback and higher dividend distribution.

Valuation: Overstated discount

The share price has recovered well from a dip during Q2, when newsflow was relatively thin, and is now 31% off those lows and up 40% year-to-date as the outlook has clarified. Across FY21 and FY22, the shares still sit at a substantial valuation discount to the peer set of 30% on EV/EBITDA and 21% on P/E. Given the anticipated margin expansion, we still believe this differential is overstated.

Board reorganisation

Alongside the financial results for Q321, a number of changes were announced that will put the group board into a more conventional structure for a global operation. Firstly, the roles of chairman and CEO are to be separated, with Tim Andree (currently executive chairman of DI) to be appointed as Dentsu Group’s first non-Japanese (non-executive) chairman from March 2022. There is to be a generational change at CEO level, where Hiroshi Igarashi, currently president and CEO of DJN, will step up after the retirement of Toshihiro Yamamoto on 1 January.

DJN will be led by Norihiro Kuretani and Wendy Clark remains in her role at DI.

The group also intends appointing four new independent outside directors who will add a wide variety of experience from different sectors including entertainment and finance. Further details will be provided nearer the time.

Quarterly progression

DJN particularly strong

As described above, and shown clearly in the exhibit below, the performance of DJN in Q321 was clearly outstanding and the Olympics/Paralympics will likely have played a major part, on top of an improvement in Japanese consumer confidence. There has been a resurgence in TV, media and out-of-home as well as continuing progress in digital. In terms of sectors, technology, beverages, financials and luxury goods were all highlighted.

While the quarter-on-quarter and year-on-year growth is clearly strong, the two-year stack (as is also being used across the industry to sidestep the issues that severely impacted sectoral revenues during the strictest pandemic lockdowns) also shows progress, with Q321 RLCoS up 1.7% on Q319.

Overall Q1-Q321 organic growth of RLCoS was 18.2% and full year guidance is for 17%, implying a slightly lower, but still strong, rate for Q421 of 15.1%.

Similarly, the operating margin achieved in the nine months of 2021 to date is 26.9%. Full-year margin guidance for DJN is 23.5%. Mechanistically, this reverses out to a Q421 operating margin of 18.0%. This looks compatible with the narrative of additional investment in talent and in IT, particularly to drive the customer transformation and technology offering.

Exhibit 1: DJN quarterly RLCoS progression

Exhibit 2: DI quarterly RLCoS progression

Source: Company

Source: Company

Exhibit 1: DJN quarterly RLCoS progression

Source: Company

Exhibit 2: DI quarterly RLCoS progression

Source: Company

DI good growth, with slight easing in Q3

DI reported organic growth of 13.4% in Q321, with particularly strength in Media (+17.3%) and CXM (+11.2%). Creative was slightly more challenging in EMEA and China, with live and experiential still affected by the pandemic restrictions and China affected by its exposure to the automotive industry. Operating margin for the quarter was 16.2%.

Looking at the nine-month figures, RLCoS was up 8.6%, delivering an operating margin of 13.7%. On a two-year stack, performance remains a little below FY19 levels, with APAC the most challenging region.

Full-year guidance is for DI to grow organically in ‘high single digits’. It is not possible to reverse this out precisely, as there has been the acquisition of LiveArea to take into account. In terms of the operating margin, management guidance is for 15.0% for the full year. With 13.7% recorded for the first nine months, here the implication is for a stronger operating margin in Q421 of 18.9%, which again is compatible with a narrative of a stronger top line on a cost base reduced by the transformation programme.

Revisions to forecasts

We have updated our forecasts in light of the progress made in the year to date and the raised management guidance for the full year. Figures were also lifted at the interim stage.

Exhibit 3: Summary forecast changes

Net revenue (¥bn)

Underlying operating profit (¥bn)

Underlying EPS (¥)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2020

835

835

124

124

250

250

2021e

937

967

+3

154

174

+13

336

378

-1

2022e

978

1,000

+2

187

180

-4

376

385

+2

Source: Company, Edison Investment Research

The most notable change at this juncture is the increase in adjusted operating margin. This reflects the uplift in net revenue from the healthier trading environment delivering some operational gearing, but also the success to date of the accelerated transformation plan resulting in lower cost than had earlier been forecast, as explained in the segmental descriptions above.

Management is indicating a 30% earnings payout ratio (which will be stepped up to 35% over the next few years) and have now indicated a total dividend payment for FY21 of ¥113.5, up from the previous projection of ¥101.

Valuation

Exhibit 4: Peer group valuation

 Company

Price (local ccy)

Market Cap (US$m)

YTD (%)

EV/Sales (x)

EV/EBITDA (x)

P/E (x)

Dividend yield (%)

CY20

CY20

CY21

CY22

CY20

CY21

CY22

Omnicom

US$70

14,794

12

1.2

7.6

6.5

6.4

14.1

11.3

10.8

3.7

WPP

1109p

17,498

39

1.5

10.2

8.8

8.2

19.3

14.5

12.8

0.0

Interpublic

US$37

14,565

57

1.9

13.3

9.0

8.8

22.2

14.2

14.1

2.8

Publicis

€59

17,118

45

1.8

8.4

7.6

7.2

15.2

12.1

11.6

3.4

Hakuhodo

¥1941

6,359

37

1.9

11.2

9.1

8.1

27.3

23.0

19.3

1.5

Peer average

 

 

38

1.7

10.1

8.2

7.7

19.6

15.0

13.7

2.3

Dentsu

¥4275

11,299

39

1.4

13.1

6.2

5.0

17.2

11.4

11.2

1.7

Premium/(discount)

 

 

1%

-15%

29%

-24%

-35%

-12%

-24%

-19%

-27%

Source: Refinitiv. Note: Priced at 12 November 2021.

We now compare Dentsu with peers on FY21e and FY22e, rather than across FY20-22e, particularly as there is such clear management guidance for FY21e. On this basis, the shares are trading on an average discount of 30% on EV/EBITDA and 21% on P/E.

Exhibit 3: 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

1,068,700

1,125,000

Cost of Sales

(85,832)

(108,496)

(104,201)

(101,800)

(125,000)

Revenue less pass through costs

932,680

939,385

835,042

966,900

1,000,000

EBITDA

 

 

171,404

160,279

90,063

189,458

234,091

Normalised operating profit

 

 

153,229

140,751

123,979

174,300

180,000

Amortisation of acquired intangibles

(35,123)

(34,806)

(31,877)

(29,857)

(29,857)

Exceptionals

(2,149)

(99,733)

(229,631)

97,619

0

Share-based payments

(4,313)

(9,568)

(3,094)

0

0

Reported operating profit

111,638

(3,358)

(140,625)

243,400

150,143

Net Interest

(17,714)

(42,103)

(1,419)

(39,126)

(36,457)

Joint ventures & associates (post tax)

2,699

517

910

0

0

Exceptionals

52,128

2,175

0

(23,000)

(3,000)

Profit Before Tax (norm)

 

 

190,342

101,340

123,470

135,174

140,543

Profit Before Tax (reported)

 

 

148,751

(42,769)

(141,134)

181,274

110,686

Reported tax

(51,250)

(30,136)

(11,162)

(58,914)

(33,538)

Profit After Tax (norm)

107,321

86,653

78,177

111,131

111,894

Profit After Tax (reported)

97,501

(72,905)

(152,296)

122,360

77,148

Minority interests

(7,185)

(7,987)

(7,299)

(6,060)

(6,060)

Discontinued operations

0

0

0

0

0

Net income (normalised)

97,420

76,122

69,891

105,521

105,834

Net income (reported)

90,316

(80,892)

(159,595)

116,300

71,088

Basic average number of shares outstanding (m)

282

281

279

279

275

EPS - basic normalised (¥)

 

 

346

271

250

378

385

EPS - diluted normalised (¥)

 

 

346

271

249

376

383

EPS - basic reported (¥)

 

 

320

(288)

(571)

417

259

Dividend (¥)

90

95

71

114

121

Net revenue growth (%)

6.3

0.7

(11.1)

15.8

3.4

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

18.4

17.1

10.8

19.6

23.4

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

16.4

15.0

14.8

18.0

18.0

BALANCE SHEET

Fixed Assets

 

 

1,702,899

1,862,033

1,455,591

1,326,068

1,298,723

Intangible Assets

1,036,772

1,000,313

800,551

898,288

875,681

Tangible Assets

199,207

315,116

280,196

88,682

83,944

Investments & other

466,920

546,604

374,844

339,098

339,098

Current Assets

 

 

1,935,586

1,933,691

1,924,816

2,230,565

2,370,224

Stocks

28,580

21,007

23,848

23,298

28,608

Debtors

1,368,728

1,424,127

1,293,370

1,390,774

1,464,041

Cash & cash equivalents

416,668

414,055

530,692

559,972

621,055

Other

121,610

74,502

76,906

256,520

256,520

Current Liabilities

 

 

(1,785,608)

(1,821,881)

(1,729,657)

(1,810,058)

(1,879,469)

Creditors

(1,341,461)

(1,390,778)

(1,247,172)

(1,317,575)

(1,386,986)

Tax and social security

(42,981)

(17,689)

(71,228)

(71,228)

(71,228)

Short term borrowings

(104,879)

(184,816)

(72,533)

(82,533)

(82,533)

Other

(296,287)

(228,598)

(338,724)

(338,722)

(338,722)

Long Term Liabilities

 

 

(742,129)

(883,971)

(800,985)

(752,269)

(752,269)

Long term borrowings

(433,979)

(439,110)

(512,274)

(463,558)

(463,558)

Other long term liabilities

(308,150)

(444,861)

(288,711)

(288,711)

(288,711)

Net Assets

 

 

1,110,748

1,089,872

849,765

994,305

1,037,209

Minority interests

(63,129)

(77,556)

(63,483)

(69,543)

(75,603)

Shareholders' equity

 

 

1,047,619

1,012,316

786,282

924,762

961,606

CASH FLOW

Op Cash Flow before WC and tax

208,490

47,198

(55,166)

265,222

194,634

Working capital

7,866

(28,254)

(22,538)

(26,451)

(9,166)

Exceptional & other

(35,011)

148,452

213,845

(31,401)

4,580

Tax

(48,296)

(87,439)

(47,828)

(98,040)

(69,995)

Net operating cash flow

 

 

133,049

79,957

88,313

109,330

120,053

Capex

(31,322)

(31,000)

(19,948)

157,360

(8,746)

Acquisitions/disposals

(50,555)

(47,860)

(26,585)

(130,820)

(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)

(31,373)

(32,225)

Other

10,768

(35,674)

141,820

(669)

0

Net Cash Flow

29,873

(84,616)

144,022

73,828

61,082

Opening net debt/(cash)

 

 

154,752

122,190

209,870

54,115

(13,881)

FX

(18,281)

1,490

(12,071)

(5,832)

0

Other non-cash movements

20,970

(4,554)

23,804

0

0

Closing net debt/(cash)

 

 

122,190

209,870

54,115

(13,881)

(74,964)

Source: Dentsu, Edison Investment Research

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