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Upgrade to organic growth guidance

Dentsu Group 15 February 2022 Update
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Dentsu Group

Upgrade to organic growth guidance

FY21 results

Media

15 February 2022

Price

¥4,305

Market cap

¥1,189,472m

Net cash (¥bn) at end December 2021

144

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

9.6

3.6

17.1

Rel (local)

11.0

6.3

15.2

52-week high/low

¥4,420

¥3,170

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

AGM

May 2022

Q1 update

May 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

A strong Q4 performance in recovering markets means Dentsu has posted good figures for FY21 and enters FY22 with positive momentum, particularly in the Customer Transformation and Technology (CT&T) activities. The strategic plan remains to build this area to 50% of revenue less cost of sales (RLCoS), from 29.1% in FY21. Medium-term guidance for group organic growth in RLCoS is upgraded from 3–4% to 4–5%, with 4% guided for FY22. A ¥40bn share buyback is planned, funded from year-end net cash following September’s sale (and leaseback) of the Shiodome building. The share price remains at a substantial discount to peers.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(
¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/20

835.0

123.5

250

71

17.2

1.6

12/21

976.6

146.0

389

118

11.1

2.7

12/22e

1,059.2

165.4

404

130

10.7

3.0

12/23e

1,102.2

173.2

423

141

10.2

3.3

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

Broad-based strength in Q421

The good performance in Q421 was across both Dentsu Japan Network (DJN) and Dentsu International (DI), with the former posting organic progress at the RLCoS level of 17.3% and the latter 12.1%. Within DI, a very strong Media performance in the Americas in December lifted Q421 organic revenue growth there to 15.4%, despite tougher comparatives in Customer Experience Management (CXM). The cyclical recovery across the year delivered group FY21 organic RLCoS growth of 13.1%, with an underlying operating margin of 18.3%, up 350bp on the prior year. We have set our FY22 forecasts to match management guidance (an upgrade of 4% at the underlying operating profit level, with a margin of 17.7%) and initiated forecasts for FY23, with RLCoS up 4% year-on-year.

Acquisition fund to drive medium-term growth

A transformed balance sheet (year-end net cash of ¥144.4bn) allows management to drive investment to deliver growth, with an upper limit on leverage at 1.5x year-end net debt/EBITDA (medium-term target range of 1.0–1.5x). The top priority is capex, where ¥70bn of spend is identified across FY22–24. Second, a fund of ¥250–300bn for M&A is allocated over the same period, prioritising development in CT&T, alongside capability and geographic infill. As guided, the dividend payout ratio is set to lift from 30% in FY21, to 32% in FY22e and to 35% by FY24e. ¥40bn is also earmarked for a share buyback across FY22, with a maximum of 20m shares.

Valuation: Overstated discount

The share price has recovered from the dip in November last year and is now 21% off the low hit in early December. Across FY21–23e, the shares still sit at a substantial valuation discount to the peer set of 27% on EV/EBITDA and 23% on P/E. Given the improving quality of business with the increased emphasis on digital transformation, we still believe this differential is overstated.

Progress along planned lines

Q421 closed strongly for DJN and DI, with the group in much better shape given the simplification of the structure and costs that have been taken out of the business under the accelerated transformation plan (described in detail in our initiation report). These cost savings were previously guided at the group level of ¥75bn annualised from FY22 (of which ¥50bn falling in FY21).

The operational changes carried out in FY21 across the group should enable Dentsu to benefit to a greater extent from the structural shifts in the global market, with the burgeoning demand from corporate clients to transform their businesses to enhance and upscale their digital approach. The proportion of RLCoS from CT&T rose to 29.1% for the year, from 27.5% in FY20. The percentage at DJN was flat at 24.4% but rose to 32.6% at DI (FY20: 29.7%), helped by favourable currency movements. The reorientation of the group is regarded as a continuing process, with the structural trend given an additional impetus by the effects of the pandemic, highlighting the importance of businesses having a multi-dimensional understanding of their own customers. The marriage of data with creativity and technology is regarded as key.

The objective is to build CT&T to half of the group revenue base over (unspecified) time, fuelled by internal organic growth and supplemented by M&A, with the hypothecation of a fund of ¥250–300bn to be applied across FY22–24e. We would anticipate that average deal size would be ahead of the ¥25–30bn region typical historically. LiveArea, bought in Q321, and already rebranded as part of Merkle within DI, has been reported to have cost around ¥250m, although the price has not been formally disclosed. LiveArea registered an impressive organic growth rate of over 30% in Q421. Acquisitions of ¥50bn and subsidiary investments of ¥107bn are disclosed in the FY21 summary cash flow statement.

The proportion of RLCoS from the digital domain was 35.7% (+0.9%) for DJN but decreased to 61.8% for DI (-5.7%), with the proportion diluted by a particularly strong showing from the Media segment as confidence stepped up more sharply towards the close of the year.

Exhibit 1: DJN quarterly RLCoS progression

Exhibit 2: DI quarterly RLCoS progression

Source: Dentsu Group

Source: Dentsu Group

Exhibit 1: DJN quarterly RLCoS progression

Source: Dentsu Group

Exhibit 2: DI quarterly RLCoS progression

Source: Dentsu Group

Upgrade to FY22 forecast, new FY23e figures

We upgraded on the back of increased management guidance at the time of the Q321 figures in November, but, as described above, the fourth quarter performance was also better than had earlier been anticipated.

Exhibit 3: Summary changes to forecasts

Revenue LCoS (¥bn)

Underlying operating profit (¥bn)

EPS (¥)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2021

966.9

976.6

+1

174.3

179.0

+3

378

389

+3

2022e

1,000.0

1,059.2

+6

180.0

187.9

+4

385

404

+5

2023e

-

1,102.2

N/A

-

195.2

N/A

-

423

N/A

Source: Dentsu Group accounts, Edison Investment Research

We now move our FY22e RLCoS forecast up to the level guided by management at ¥1,059bn, which represents an increase over the prior year of 8.5%. At the organic growth level, this equates to 4% for the group, being a blend of 2–3% at DJN and 4-5% at DI.

The new guided underlying operating profit of ¥187.9bn, is a 5% improvement over that achieved in FY21, so a slight diminution of underlying operating margin to 17.7% from 18.3%. This is the impact of the additional investment being made over the medium term to position the group to take advantage of these longer-term growth opportunities. Management anticipates a flat underlying operating margin at DI (15.9% in FY21), and a more pronounced dip for DJN from 22.9% to 22.0%.

We are now publishing our FY23e figures, which we base on a conservative growth assumption for RLCoS of 4.1%, at the lower end of the newly increased medium-term guided range of 4–5%, and with a reasonably stable underlying operating margin. The dividend payout ratio is set to increase towards 35% in FY24e, so we have set our modelling for FY23e at 33.3%, following 32% for FY22e (as guided), up from 30% for FY21.

Cash and leverage give plenty of M&A firepower

The group bought back ¥30bn of shares in FY21. While we have built the FY22e planned ¥40bn share buyback into our cashflow modelling, we will only include acquisitions as and when they complete.

The end-FY21 balance sheet shows total debt of ¥579.2bn, with cash and cash equivalents if ¥723.5bn. The proceeds from the sale and leaseback of the Shiodome headquarters building comprised ¥305.2bn. Further asset sales are possible but are not likely to be on the same scale.

With ¥144.4bn in net cash on the balance sheet at end FY21, there is obviously plenty of scope for M&A spend over and above the fund being set aside specifically to support the expansion in CT&T.

Valuation: Discount remains substantial

We consider Dentsu’s valuation in the context of the major global marketing services holding companies. Omnicom, Publicis and Interpublic have all published their FY21 figures and the upswing in demand has been apparent across the board. WPP is set to publish its figures on 24 February.

From the table below, it is clear that Dentsu’s valuation remains at a marked discount to global peers, averaging 27% across EV/EBITDA and 23% on a P/E basis across FY21–23e.

Exhibit 4: Peer valuation, performance

 

Price

Market cap

YTD

EV/sales (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

FY21 organic growth

Company

(local ccy)

(US$m)

(%)

CY21

CY21

CY22

CY23

CY21

CY22

CY23

(%)

(%)

Omnicom

US$86

18,047

17

1.5

8.8

8.7

8.4

14.1

13.8

12.8

3.1

8.5

WPP

1214p

18,829

9

1.6

9.6

8.9

8.3

16.1

14.1

12.4

2.5

 

Interpublic

US$36

15,530

5

1.8

9.4

8.8

8.6

15.2

15.0

14.2

2.7

11.9

Publicis

€65

18,846

10

1.8

8.0

7.4

7.2

13.0

12.1

11.7

4.6

10.0

Hakuhodo

¥1,589

5,361

-19

0.5

7.4

6.9

6.5

16.5

14.9

13.9

1.6

 

Peer average

 

4

1.4

8.6

8.1

7.8

15.0

14.0

13.0

2.9

10.1

Dentsu

¥4,380

10,938

7

1.4

6.2

5.9

5.7

11.2

10.8

10.4

2.7

13.1

Premium/(discount)

 

2%

2%

-28%

-27%

-27%

-25%

-23%

-20%

-7%

30%

Source: company accounts, Refinitiv. Note: Prices at 11 February.

Exhibit 5: Financial summary

¥m

2019

2020

2021e

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,047,881

939,243

1,085,592

1,200,000

1,250,000

Cost of Sales

(108,496)

(104,201)

(109,015)

(140,800)

(147,700)

Revenue less pass through costs

939,385

835,042

976,577

1,059,200

1,102,224

EBITDA

 

 

160,279

90,063

195,006

203,878

211,153

Normalised operating profit

 

 

140,751

123,979

179,028

187,900

195,175

Amortisation of acquired intangibles

(34,806)

(31,877)

(29,409)

(31,379)

(31,379)

Exceptionals

(99,733)

(229,631)

94,368

0

0

Share-based payments

(9,568)

(3,094)

0

0

0

Reported operating profit

(3,358)

(140,625)

241,841

156,521

163,796

Net Interest

(42,103)

(1,419)

(35,491)

(32,716)

(32,351)

Joint ventures & associates (post tax)

517

910

2,484

10,200

10,404

Exceptionals

2,175

0

0

0

0

Profit Before Tax (norm)

 

 

101,340

123,470

146,021

165,385

173,229

Profit Before Tax (reported)

 

 

(42,769)

(141,134)

208,834

134,005

141,849

Reported tax

(30,136)

(11,162)

(93,979)

(34,528)

(46,243)

Profit After Tax (norm)

86,653

78,177

116,254

117,778

121,260

Profit After Tax (reported)

(72,905)

(152,296)

114,853

99,477

95,606

Minority interests

(7,987)

(7,299)

(6,463)

(6,478)

(6,669)

Discontinued operations

0

0

0

0

0

Net income (normalised)

76,122

69,891

109,203

109,557

114,591

Net income (reported)

(80,892)

(159,595)

108,390

93,000

88,937

Average Number of Shares Outstanding (m)

281

279

279

269

269

EPS - normalised (¥)

 

 

271

250

392

407

425

EPS - normalised fully diluted (¥)

 

 

271

249

389

404

423

EPS - basic reported (¥)

 

 

(288)

(571)

389

345

330

Dividend (¥)

95

71

118

130

141

Net revenue growth (%)

0.7

(11.1)

16.9

8.5

3.3

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

17.1

10.8

20.0

19.2

19.3

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

15.0

14.8

18.3

17.7

17.8

BALANCE SHEET

Fixed Assets

 

 

1,862,033

1,439,542

1,305,203

1,315,971

1,323,739

Intangible Assets

1,000,313

784,502

858,748

874,254

886,760

Tangible Assets

315,116

280,196

88,682

83,944

79,206

Investments & other

546,604

374,844

357,773

357,773

357,773

Current Assets

 

 

1,933,691

1,924,816

2,214,088

2,374,745

2,487,498

Stocks

21,007

23,848

26,880

34,718

38,392

Debtors

1,424,127

1,293,370

1,386,767

1,532,915

1,596,787

Cash & cash equivalents

414,055

530,692

723,541

730,213

777,374

Other

74,502

76,906

76,899

76,899

76,899

Current Liabilities

 

 

(1,821,881)

(1,759,071)

(1,883,417)

(2,032,303)

(2,097,372)

Creditors

(1,390,778)

(1,247,172)

(1,412,757)

(1,561,643)

(1,626,712)

Tax and social security

(17,689)

(71,228)

(71,228)

(71,228)

(71,228)

Short term borrowings

(184,816)

(72,533)

(72,533)

(72,533)

(72,533)

Other

(228,598)

(368,138)

(326,899)

(326,899)

(326,899)

Long Term Liabilities

 

 

(883,971)

(800,985)

(726,400)

(720,783)

(715,166)

Long term borrowings

(439,110)

(512,274)

(506,657)

(501,040)

(495,423)

Other long term liabilities

(444,861)

(288,711)

(219,743)

(219,743)

(219,743)

Net Assets

 

 

1,089,872

804,302

909,474

937,629

998,858

Minority interests

(77,556)

(63,483)

(64,440)

(70,918)

(77,587)

Shareholders' equity

 

 

1,012,316

740,819

845,034

866,711

921,111

CASH FLOW

Operating Cash Flow

47,198

(55,166)

254,221

181,363

189,207

Working capital

(28,254)

(22,538)

69,155

(5,098)

(2,481)

Exceptional & other

148,452

213,845

(59,307)

3,307

2,942

Tax

(87,439)

(47,828)

(149,880)

(67,244)

(78,594)

Net operating cash flow

 

 

79,957

88,313

114,189

112,327

111,074

Capex

(31,000)

(19,948)

305,200

(8,746)

(8,746)

Acquisitions/disposals

(47,860)

(26,585)

(49,672)

(18,000)

(15,000)

Net interest

0

0

0

0

0

Equity financing

(20,008)

(10,004)

(30,010)

(40,000)

0

Dividends

(30,031)

(29,574)

(23,473)

(33,293)

(36,508)

Other

(35,674)

141,820

(108,773)

0

0

Net Cash Flow

(84,616)

144,022

207,461

12,369

50,820

Opening net debt/(cash)

 

 

122,190

209,870

54,115

(144,351)

(156,640)

FX

1,490

(12,071)

(8,995)

0

0

Other non-cash movements

(4,554)

23,804

0

0

0

Closing net debt/(cash)

 

 

209,870

54,115

(144,351)

(156,640)

(207,460)

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.

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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.

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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.

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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.

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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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