Dentsu Group — Set for a stronger H223

Dentsu Group (TYO: 4324)

Last close As at 20/06/2024

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Research: TMT

Dentsu Group — Set for a stronger H223

Dentsu experienced difficult trading conditions in its first half, with US client hesitancy, poor Chinese macro conditions and a one-off hit from a problematic project in the DACH region, compounded by demanding comparatives. These ease in H223, and trading should also benefit from one-off events like the Rugby World Cup, as well as the contribution from Tag, consolidated from 1 July. FY23 guidance is now for organic net revenue growth of 0% to -2% (was 1–2%) and a 17.0% operating margin (was 17.5%). With the inclusion of Tag, operational cost savings and lower interest following debt restructuring, guidance for EPS is unchanged. We have updated our forecasts to reflect this, with a knock-on into FY24. The valuation remains well below peers and long-term average metrics.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Dentsu Group

Set for a stronger H223

Company outlook

Media

18 August 2023

Price

¥4,165

Market cap

¥1,125bn

Net debt at 30 June 2023

¥36.7bn

Shares in issue

264.38m

Free float

75.8%

Code

DENN

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.9)

(8.3)

(14.1)

Rel (local)

(11.5)

(13.2)

(23.5)

52-week high/low

¥4,960

¥4,045

Business description

Dentsu Group is a holding company, operating in over 145 countries. It provides a wide range of client-centric integrated communications, media and digital services.

Next events

Q323 results

13 November 2023

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Milo Bussell

+44 (0)20 3077 5700

Dentsu Group is a research client of Edison Investment Research Limited

Dentsu experienced difficult trading conditions in its first half, with US client hesitancy, poor Chinese macro conditions and a one-off hit from a problematic project in the DACH region, compounded by demanding comparatives. These ease in H223, and trading should also benefit from one-off events like the Rugby World Cup, as well as the contribution from Tag, consolidated from 1 July. FY23 guidance is now for organic net revenue growth of 0% to -2% (was 1–2%) and a 17.0% operating margin (was 17.5%). With the inclusion of Tag, operational cost savings and lower interest following debt restructuring, guidance for EPS is unchanged. We have updated our forecasts to reflect this, with a knock-on into FY24. The valuation remains well below peers and long-term average metrics.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/21

976.6

146.0

392

118

10.6

2.8%

12/22

1117.0

186.5

485

155

8.6

3.7%

12/23e

1152.5

175.4

461

156

9.0

3.7%

12/24e

1203.8

190.2

509

177

8.2

4.2%

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

Japan performance leads the regions in H1

Customer Transformation & Technology (CT&T) was the main driver behind the improved Japanese performance in Q223, across a wide range of client sectors. This was the bright spot of Q223 trading, with organic revenue in the Americas down 7.4%, hampered by well-publicised tech client hesitancy over Media spend and tough comparatives. Results from the EMEA region would have been positive for Q223 and H123 but for a complex business transformation project across the DACH region. APAC ex-Japan was held back by conditions in China, where the group indexes more heavily in cyclical industries. Regional management has been strengthened in the US and India, and management notes that the new business pipeline is encouraging.

Simplification and clarification in One dentsu

Dentsu is now a good way through a substantial internal restructure, moving from a multiplicity of brands in what was effectively a demarcated business between Japan and the rest of the world, to an integrated global organisation built around six core agency brands. The balance sheet has been reconfigured, with the sale of property and equity assets funding investment in the business, M&A and a return of capital to shareholders via share buybacks and dividends. Following Tag, the third largest acquisition in Dentsu’s history, we anticipate further deals of substance in the CT&T space. We forecast net cash at end FY23, well below targeted leverage of 1.0–1.5x.

Valuation: Sizeable discount persists

Dentsu’s share price is now up 7% year to date, while global marketing service group peers have gained an average of 4%. Dentsu’s shares trade below their long-term average of 1.4x EV/net revenue and 13.0x P/E and at a sizeable discount to peers of 33% on average EV/EBITDA for FY22–24e, a level that we believe overstates its comparative risk profile.

Investment summary

Company description: An integrated global communications services provider

Dentsu Group is a holding company, headquartered in Tokyo, Japan, and operating globally. It provides communications services, media and digital services to a client base diversified by geography and by scale. Over the past few years, the group has undergone considerable change from being a traditional media holding company to one with a strong emphasis on data driven business solutions, known in the company’s terminology as ‘Customer Transformation and Technology’, or CT&T. Since the start of FY23, the group has been run as one unified organisation, having previously been a combination of the domestic Japanese group and the international operations. It is now focused around six core agency brands, detailed below.

Valuation: Sizeable discount to peers and DCF

Dentsu Group is the fifth largest quoted agency holding company globally, after Publicis, Omnicom, Interpublic and WPP, with one smaller Japanese peer, Hakuhodo. All have performed well so far this year, as the worst fears of recession in major developed economies have receded, with Dentsu’s share price up 7% and peers up 4%. With distortions regarding the definitions of appropriate revenue lines (gross or net of pass-through costs, etc) and variations in tax affecting the flow through to EPS, we regard EV/EBITDA as the least-worst comparison metric. Dentsu currently trades at a 33% discount to FY22–24e average EV/EBITDA multiples, which likely reflects lower levels of market familiarity, particularly when compared with the US-based Omnicom and Interpublic. Parity would imply a share price of ¥5,403, while our discounted cash flow (DCF) analysis (WACC 9.0%, terminal growth 2%) returns a value of ¥6,137.

Financials: FY23e constrained, margin to expand in FY24e

Dentsu lowered revenue and operating margin guidance at the H123 results. This followed a slowdown in Q223 organic revenue growth due to slower spend in the Americas from technology clients and a one-off financial impact in Europe, the Middle East and Africa (EMEA) due to a complex transformation issue within the DACH cluster. EPS guidance remains unchanged following a reduction in interest costs of ¥4–5bn in FY23e, which should annualise in FY24e. We have lowered our FY23e and FY24e revenue and operating margins to reflect the updated guidance.

Our forecasts now include the acquisition of Tag, which completed at end June and will contribute to group revenues from 1 July.

We anticipate a fall in the adjusted operating margin in FY23 to 17.0% (in line with management guidance) as a result of the DACH issues and the investments in the One dentsu initiative and in supporting the growth of CT&T. We forecast the benefits starting to flow through in the following year, reflecting in a slight bounceback in margin to 17.3%.

Acquisitions are likely to play a meaningful further role in building the proportion of revenues from CT&T up to the 50% target level. Leverage guidance of 1.0–1.5x adjusted EBITDA indicates that there is plenty of firepower.

The balance sheet has been transformed over recent years through divestment of property assets and the disposal of cross-shareholdings in other Japanese-quoted entities. Those funds have been either reinvested in the business or in acquisitions or returned to shareholders via share buybacks and dividends. The guided payout ratio was to build to 35% and we envisage that being achieved in FY24.

Sensitivities: Economic, strategic and cultural

The biggest factor affecting top-line progress is the state of the underlying economies in which the group does business, with advertising revenues highly correlated to GDP. Operating in many countries and with growing levels of off- and near-shoring, Dentsu is exposed to both transactional and translational currency impacts, reporting financial results in Japanese yen. Competition is a perennial sensitivity, with new business levels highly scrutinised. The shift further toward CT&T in the mix increases the degree of recurring revenues and improves the visibility of earnings. The group has been undergoing an extended period of major structural and cultural change, which can have destabilising effects. It can also reinject energy and focus. The advertising industry comes with high levels of reputational risk. This has happened to Dentsu recently regarding the Tokyo Olympics, when the group was indicted on a number of charges, with some sanctions imposed by the Japanese authorities as a consequence (which has a negligible impact at the group level). The situation was examined at the company’s behest by a highly qualified independent review panel, resulting in recommendations that we believe should ensure no repetition.

Company description: Improving customer experience to deliver value along the chain

Dentsu Group is a global leader in media and digital communications, founded and headquartered in Japan and now operating in around 145 countries and regions globally. Dentsu was founded on 1 January 1901 and has therefore a vast heritage on which to draw. It listed on the Tokyo Stock Exchange in 2001, as an international advertising and PR business, growing since that date through a combination of organic progress and considerable M&A activity.

The business emphasis shifted markedly in 2016, when Dentsu bought Merkle in the US. Merkle’s objective is to ‘use data, technology and analysis to help the world’s best brands make their advertising more addressable, their experiences more personal, and manage relationships over time’. The changes to the underlying marketing communications market with the growth in importance of Google and Meta have necessitated a pivot to data-centricity, making it a central element of Dentsu’s client service proposition. Fuller descriptions of the group agencies are given below.

Digital activities accounted for 54% of FY22 group revenues, with CT&T representing 32% (33% of H123 revenues). Management targets this latter category to grow to 50% of group revenues.

Having grown through an extensive acquisition programme to diversify beyond its Japanese home market, the organisation had become unwieldy and inefficient. An integration programme, One dentsu, was initiated in early 2020 and was progressed that summer as an ‘accelerated transformation plan’. The objective was to simplify the business and make it fit for purpose, reducing structural overheads and allocating capital to growth and innovation.


In the video below, CFO Nick Priday provides an overview of the One dentsu initiative.

Exhibit 1: Interview with CFO Nick Priday

Source: Edison Investment Research

Strategy built around growth in CT&T

With the FY21 results published in February 2022, management set out its strategy for the FY22–24 period, focused around four themes, which is summarised below.

1. Transformation and growth

M&A investments: focus on high-growth CT&T assets, adding capabilities and scale.

Enhance marketing communications competitiveness with data and tech.

Scale key client relationships through ‘integrated growth solutions’.

Global launch of ‘dentsu good – a sustainability accelerator’, delivering a positive social impact through collaborations with clients and partners.

Leadership targets:

Organic growth versus 2021 through 2024 CAGR 4–5%.

CT&T to reach 50% of group revenues (less cost of sales) over time (not specified).

How is it going?

Organic growth in FY22 was 4.1%, so within the target range. The previous guidance of 1–2% for FY23 implied a strong performance for FY24. The revised level of flat to -2% makes reaching the FY21–24 CAGR target likely to be out of reach. A medium-term CAGR of 4–5% from this point does, though, look feasible. Our net revenue growth forecast for FY24 is now +4.4%, with this reflecting a full year of consolidation of Tag.

CT&T constituted 32.3% of group revenues in FY22. The acquisition of Tag announced in March and likely to complete in Q3 will lift this proportion. We estimate the pro-forma FY22 proportion at 34.6% and would assume that this percentage will expand for FY23 purely based on faster underlying growth rates.

A reminder – why CT&T?

It is worth reiterating the key reasons why Dentsu’s management has identified CT&T as its preferred area for investment:

it is a structural growth area;

it complements existing services so provides opportunities for cross- and up-selling;

it generates recurring revenues;

it extends the points of contact beyond the CMO, to the CIO, chief data officer, CFO, etc, building more embedded relationships; and

it presents opportunities to lower the group cost structure by nearshoring and offshoring.

2. Operations and margin

Relentless organisational simplification to improve efficiency

Continued investment in near and offshore capabilities to improve efficiency and reduce cost to deliver services

Transformation of how Dentsu personnel connect through increased use of technology

Leadership targets:

17.0–18.0% operating margin through 2023

Operating margin to reach 18.0% in 2024

How is it going?

In FY20, Dentsu set in motion a plan to dramatically simplify the organisation, built through years of acquisitions but not necessarily followed through with integration. The aim was to structurally and permanently lower operating costs; to improve the efficiency of the balance sheet; and to improve shareholder value. This involved reducing the number of non-Japanese agency brands from over 160 to six, and focusing the Japanese operations into four domains, with a much greater emphasis on digital. Cross shareholdings in other Japanese corporates were unwound and the iconic Shiodome headquarters building in Tokyo sold and leased back.

In September 2022, Dentsu announced a further fundamental restructuring, which has done away with the differentiation between the Japanese and international operations, with the resultant organisation described as ‘One dentsu’. There is now a unified board, headed by President and CEO Hiroshi Igarashi and with the group’s first non-Japanese CFO in the appointment of Nick Priday to the role.

The group is now organised in four regions: Japan, Americas, EMEA and Asia-Pacific (APAC). It has established a new client support platform to enhance the client experience at the global level, alongside promoting Integrated Growth Solutions, which bring together the diverse capabilities within the group. Dentsu is integrating its corporate functions to build a common management platform. Further details on the main operating brands is given below.

Normalised operating margin was 18.2% in FY22 (18.4% if Russian operations were excluded). We had previously modelled that the additional investment in CT&T and in the One dentsu initiative would press on the normalised operating margin, estimating the impact as a reduction to 17.6%, with a bounce to 18.4% for FY24.

Management has now downgraded guidance for FY23 from a normalised operating margin of 17.5% to 17.0%, with most (unquantified) of this downgrade attributable to the DACH cluster issue, with the balance reflecting softer revenues in the Americas and APAC. All of the repercussions of the DACH cluster issue have been accounted for in Q223 and there should be no further impact. Normalised operating margin for the quarter was 8.7%, down from 13.9% in Q222 (H123: 11.5%, H122: 17.7%).

The 18.0% target for FY24 now looks like a stretch (our revised modelling assumes 17.3%), but is, in our opinion, achievable in FY25.

3. Capital allocation priorities and shareholder returns

Capex investment in operations, capabilities and services: c ¥70bn to 2024

Disciplined M&A with ¥250–300bn fund, with focus on CT&T and fast integration of acquired businesses

Progressive dividend payout ratio policy

Leadership targets:

Upper limit of 1.5x net debt/underlying EBITDA at year end; indicative medium-term range of 1.0–1.5x (non IFRS 16 basis)

Progressive dividend, reaching 35% payout ratio of underlying basic EPS by 2024

How is it going?

Capital spend in FY22 was ¥18.5bn, although this was offset by disposals totalling ¥13.9bn, so only shows up as a small net spend our model. We have modelled fairly modest amounts for FY23 and FY24 of ¥11bn in each year, giving a total across the planning period of ¥41.5bn, but this only includes the physical elements of property, plant and equipment. Additions to other intangibles in FY22 were ¥38bn and we currently model investment of ¥15bn and ¥11bn for FY23 and FY24, respectively. The total net investment across the period is therefore ¥69m, so very much on target.

On the M&A front, spending in FY22 was ¥40.9bn, with deferred consideration built into our modelling of ¥15.0bn in the current year, and ¥27.8bn for FY24. Payment for Tag was made before 30 June as the net debt figure provided at the H123 results was post payment. The acquisition of Tag was announced in March 2023 and it has contributed to revenues from 1 July. While not officially disclosed, the purchase price has been reported in the press at £533m, which translates to ¥98.9bn at current rates (August 2023). The total spend outlined currently is therefore running at ¥186.7bn, meaning that there is still considerable scope for further M&A. The intention is that any acquisitions should further bolster the group’s exposure to CT&T and help drive it toward the target of 50% of net revenues in the medium term.

There were six acquisitions in the 12 months to March 2023, five of which (Pexlify (UK/Ireland), Extentia (India), Aware Services (Australia), Omega (Spain) and Shift7 (US)) now form part of Merkle. The other was Ignition Point in Japan. Aware and Omega both step up the in-house expertise in Salesforce.

The announcement of the intended acquisition of Tag was also made in March, with the expectation that it would complete late Q323/early Q423. This was the third largest acquisition in the group’s history and significantly steps up the group’s capability in personalisation at scale and boosts the proportion of revenues derived from CT&T further towards the 50% goal. Completion was quicker than expected and the results will be consolidated as of 1 July 2023. The price paid was undisclosed, but press speculation put the figure at £533m, or ¥98.9bn at today’s exchange rate (¥185.6/£). Further information on Tag is given in the Key group agencies section below.

Leverage at the half-year was 0.2x net debt/underlying EBITDA post payment of the Tag consideration on the last day of the period. This is clearly well below indicated limits, suggesting that further M&A could be possible.

On dividends, the payout ratio increased from 30% in FY21 to 32% in FY22. Our modelling shows a further uplift to 34% for FY23e and 35% for FY24e.

4. Social impact and ESG

Execution of ‘2030 Sustainability Strategy’

Integration of Dentsu’s business growth and sustainability under the governance of the ‘Sustainable Business Board’

Diversity, Equity & Inclusion: chief diversity officer, Dentsu Japan Network, and chief equity officers, Dentsu International

Non-financial performance indicators linked to compensation

Leadership targets:

46% absolute reduction in CO2 by 2030; 100% renewable energy by 2030 (in markets where available)

Improvement in employee engagement score

Diverse, equal and inclusive workforce; female managers to reach 30% by 2030 (Dentsu Japan Network 25%; Dentsu International 50%)

How is it going?

In April 2023, Dentsu Group established a Group Sustainability Committee, with participants drawn from across the group. It will be responsible for formulating group strategy on environmental and social matters, as well as the reporting of progress on those initiatives to a wider audience.

Post the group restructure, Dentsu is now technically a ‘company with three committees’, indicating that it now has fully operational audit, remuneration and governance committees. There is now in place a chief governance officer (Arinobu Soga, previously group CFO) and a chief culture officer, plus chief sustainability officers for the Japanese and the ex-Japan parts of the business. Miho Tanimoto was recently appointed as chief HR officer across the entire group.

Executive compensation is linked to organic growth, operating margin and total shareholder return versus a subset of agency peers and other media companies. On the ESG front, it is also linked to CO2 emissions and female leadership targets. Scope 1 and 2 emissions have reduced by 53% from the 2019 baseline (2022 = 16,039 tCO2e, 2019 = 33962 tCO2e). Renewable electricity now accounts for 37% of Dentsu Group’s usage (International = 100%, Japan = 0.4%).

The satisfaction score from the employee engagement survey remains at 68% for 2022, with no improvement from 2021 (also 68%).

The target for female leaders was upgraded at Q123 to 45% from 30%. For the International business, the current level is 37% (level 55+), and for Japan it is 13.8% (level 35+).

Key group agencies

As part of the group restructuring, there has been a substantial reduction in the number of operating subsidiaries and legal entities, which, apart from deduplicating overheads, should allow for a more coherent service offering to large, global clients. Key Dentsu group brands include:

Merkle is a key element of the CT&T delivery. It is a global performance marketing agency with a 32-year track record of helping the best brands in the world create personalised experiences at every stage of the customer life cycle, describing itself as a customer experience transformation business partner. It has over 16,000 employees globally and operates in more than 30 countries, with over 400 leading brands as customers; a small sample is listed below.

Exhibit 2: Merkle overview

www.merkle.com

Sample of key clients

Strategic partners

Google

Adobe

Cisco

Google

Royal Caribbean

Salesforce marketing cloud

GSK

AWS

Aviva

Pega

Intel

Oracle marketing cloud

Microsoft

Sony

Samsung

Morgan Stanley

Lilly

Nestle

L’Oréal

Source: Merkle

In FY22, Merkle generated net revenue of $1.7bn, which is 19% of the group total, so, by implication, was just below 60% of the total CT&T net revenue.

Carat is an award-winning media, content and branding agency that ‘uses its peerless understanding of the passions, motivations, and behaviours of real people to bring brands and their customers together’. It has an impressive client roster, some of whom are highlighted below.

Exhibit 3: Carat overview

www.carat.com/

Sample of key clients

Kellogg's

Coca Cola

Vodafone

Heineken

Direct Line

Philips

Arla

Mastercard

Bosch

P&G

Halfords

Jacobs Douwe Egberts

Microsoft

Beiersdorf

Santander

Kraft Heinz

Source: Carat

Carat was founded over 50 years ago and was a pioneer media agency. It now employs or uses the services of over 12,000 people in more than 100 countries globally. As well as traditional media agency work, Carat’s work covers business planning for growth, audience analysis, customer experience mapping, designing and optimising cross-platform media experiences, performance marketing, retail marketing and marketing effectiveness monitoring. It is also well known for its thought leadership pieces and its regular monitoring and forecasting of global ad spending, with the latest version available to download here: dentsu Global Ad Spend Forecasts 2023 Carat.

Dentsu Creative (www.dentsucreative.com) is a recent construct (Q322) that brings together Dentsu’s existing global creative network, which was previously spread across numerous standalone agencies within the wider Dentsu group agencies, including in Japan. It describes itself as transforming ‘brands and businesses through the power of Modern Creativity’. In many instances, it works alongside Merkle and other elements of the CT&T offering as well as Dentsu’s media interests. It works with around 9,000 creatives globally ‘to deliver ideas that Create Culture, Shape Society, and Invent the Future’. The new logo represents a meeting of East and West, as well as the initials of the segment. It won the 2022 Cannes Lions Agency of the year, a highly coveted industry accolade.

Dentsu X is a global integrated marketing agency network providing communication and media planning services, content creation, technology, data and behavioural insights. It describes itself as helping ‘brands create memorable, personalised marketing solutions that meet rapidly changing consumer demands to deliver ‘Experience Beyond Exposure.’’

Exhibit 4: Dentsu X overview

www.dxglobal.com

Sample of key clients

Kao Corporation

Singapore Airlines

Nestle

MAC

Jaguar Land Rover

Huawei

DAZN

Generali

LVMH

Netflix

Lumix

Just BARE

Source: Dentsu X

Dentsu X has over 3,500 staff spread across 47 markets.

iProspect is a global digital-first, end-to-end media agency. It combines media strategy and storytelling with digital expertise and audience knowledge to promote performance-driven brand building.

Exhibit 5: iProspect overview

www.iprospect.com

Sample of key clients

Sonos

Microsoft

Cox

P&G

LG

Levi’s

Hilton

Budweiser

Source: iProspect

The iProspect team comprises a network of more than 8,000 media and performance specialists spread across 93 global markets.

These are to be joined with the latest sizeable acquisition, Tag, being bought from Advent International. The corporate narrative around this is that the original acquisition of Aegis back in FY10 brought the group significant scale; the purchase of Merkle in FY16 gave the group its strategic shift into CT&T through its focus on digitalisation; and Tag brings it all together through integration and simplification.

Exhibit 6: Tag overview

www.tagww.com

Sample of key clients

New Balance

Heineken

DFI Group

Unilever

Calvin Klein

Mondelez

Signature Kitchen Suite

Ralph Lauren

Estee Lauder

Source: Tag

Tag describes itself as an omnichannel content production partner, working in 29 countries, with over 2,700 employees. Tag has benefited from over €100m of investment, so this is not a case of an asset having been milked for cash in Advent International’s seven years of ownership.

Its service portfolio has three core elements: Creative Production (including digital video, high-end CGI, moving image, AR/VR and post-production), Technology (focused on UX design, website & platform development, managed services and digital interact) and Channel Activation (comprising strategic advisory and omnichannel content delivery).

The client roster is blue-chip (some notable names are listed above), working with 38 of the world’s leading 100 brands, and the average client relationship is over seven years long. The revenue synergies should come through quite quickly as the client rosters are scoured for immediate opportunities. A key attraction for Dentsu is Tag’s Digital Interact, an end-to-end proprietary production and marketing execution tool. This has the potential to be efficaciously utilised across Dentsu group agencies. The benefits from the dynamic content production within Digital Interact, for example in mass personalisation, could be significant and will certainly bring some currently subcontracted activity back in-house.

Exhibit 7: Tag sizzle reel

Source: Dentsu/Tag

Management team restructured

The new corporate structure of One dentsu was accompanied by a reconfiguration of the board and the group management team. At board level, there are now 10 directors, of whom two are female and four are non-Japanese nationals.

The group management team is now integrated, having previously been run as two distinct operational teams for Dentsu Japan Network and Dentsu International. There are 36 in the team, of whom 21 constitute the executive management team.

Fuller details of the team are given here: 2022074-1114en.pdf (dentsu.com)

Shifting contextual landscape

Global advertising spend has a correlation with GDP, as shown below, with advertising spend generally exaggerating the changes in underlying GDP (ie underperforming in times of downturn and outperforming in stronger periods). The US market is the largest by value (see Exhibit 7, below) and Dentsu’s latest edition of Global Ad Spend Forecasts (downloadable here: dentsu Global Ad Spend Forecasts 2023) shows a very strong performance in 2022 at +12.9%, compared with global growth of +7.9%. The anticipated progress for the current year is for growth of 2.6%, against global growth of +3.3%. The fastest growing markets are India (+14.5%), Brazil (+5.4%) and China (+5.1%). North American market growth is set to rebound in FY24, with forecast growth of 5.5%, ahead of Asia-Pacific at +5.1%.

Exhibit 8: Global GDP and global ad spend 2000–25e

Exhibit 9: Largest global ad spend markets, FY22

Source: World Bank, Dentsu

Source: Dentsu

Exhibit 8: Global GDP and global ad spend 2000–25e

Source: World Bank, Dentsu

Exhibit 9: Largest global ad spend markets, FY22

Source: Dentsu

Japan remains the world’s third largest advertising market. 2022 turned out better than had been anticipated with 4.4% growth (Dentsu had predicted 3.6% in its December 2022 Global Ad Spend Report). Some of this was due to the timing of the spend of advertising budgets, though, and estimates for FY23 have retreated from +1.5% to +1.0% to $54.1bn. The Japanese ad market remains well behind the curve on digitisation and is markedly overweighted to television, which is forecast to decline 2.4% in FY23 before staging a slight comeback to +1.4% in FY24. The different dynamics are at least in part attributable to the country’s demographics, with an older population favouring more traditional media, although the ‘digital natives’ will obviously be moving up the age range bands over time.

Exhibit 10: Regional ad spend growth FY20–25e

Exhibit 11: Japanese population age profile 1960–2060e

Source: Dentsu

Source: Statistics Bureau of Japan

Exhibit 10: Regional ad spend growth FY20–25e

Source: Dentsu

Exhibit 11: Japanese population age profile 1960–2060e

Source: Statistics Bureau of Japan

Large agency groups still dominate

The marketing services industry remains heavily influenced by the large global agency holding companies, listed below in Exhibit 11. Over recent years and as digital transformation has become a central theme, the traditional industry heavyweights have been joined by the large global consulting companies. In the more data-led, tech-driven space, key competitors would commonly include Accenture Interactive, Deloitte Digital and PWC. Of these, only Accenture makes partial disclosure of its marketing-based activities. WPP, Omnicom and the others (as listed below) are all keen to push their digital credentials, with the range of activities and direction of travel highlighted below.

Exhibit 12: Comparative market positioning

Source: Dentsu, Edison Investment Research

As an industry, marketing services has traditionally been ‘people heavy’, although with a degree of flexibility through the extensive use of freelancers. The pandemic drew attention to the marketing service companies’ relative cost bases in terms of payroll-related costs but also property costs, where historically flagship premises were part of the client marketing effort.

Exhibit 13: Large global agency groups by FY22 net revenue

Agency group

$m

Employment costs/net revenue %

WPP

13,653

65.4

Omnicom

13,078

73.5**

Publicis

11,093

62.5

Accenture (Communications, Media & Technology practice)

8,883

Not disclosed

Dentsu

8,808

61.9

Interpublic

8,175

64.5

Hakuhodo

3,069*

47.4

Source: Company accounts, Refinitiv. Note: Translated at average FX rates for 2022. *Year-end March 2023. **Calculated against gross revenue.

Sensitivities

The key underlying sensitivity to the financial results is the health of the underlying economy, as demonstrated in Exhibit 7 above, which shows that global advertising spend tends to outperform the economy on the upturns and underperform on the downturns. Within this broad pattern there are other factors, such as major sporting events or political elections, that can have a substantive impact on advertising demand.

Competition will always be a factor and clients review their relationships with their agencies as a matter of course. The shift in the nature of the work being carried out is leading to a wider peer set, with the major global consultancies vying for the digital transformation business. In-housing by clients has been a feature of the market over recent years and may remain so. Close partnership relationships can mitigate this risk.

Major brands reviewing and changing their media account partners can disrupt the flow of business, with multiple reviews often happening in the same reporting periods, followed by periods of relative calm. Client loss is another perennial issue, closely tied to the competitive landscape.

The degree of exposure to different sectors of the economy can also have a substantive impact, and this has been the case over the last year with the major negative attitude shift by and towards the technology sector. Dentsu is more heavily weighted to this area than some of its peers, particularly within its US operations, which has been a constraint on financial performance in recent reporting periods but may ameliorate as the year progresses.

Currency: Dentsu’s key exchange rate is the US dollar to Japanese yen, although, with subsidiaries globally, other currencies are also relevant.

The accelerated transformation plan involves a major reconfiguration of the business. To deliver on management’s top-line growth ambitions and margin improvement, the plan must be executed as envisaged.

Reputational risks can occur because of internal issues, client problems or controversy. The historical issues surrounding pre-events for the Tokyo Olympics are a case in point, although the financial consequences have been limited. The independent review on this has now concluded, with the recommendation for a cultural shift to regarding achieving client goals in a broader context, alongside additional transparency, stricter compliance guidelines and enhanced training. For more details, please see Dentsu’s news release about the report.

Particular risks arise over the handling of data and its security. Regulatory risks are also relevant in this context.

Valuation

Looked at across an extended period, back to 2015, Dentsu’s valuation is at or near lows to long-term average across the standard metrics of EV/revenue less cost of sales, EV/EBITDA and P/E, as is shown in the three exhibits below. The disruption from the impact of the pandemic is particularly clear to see in the EV/EBITDA.

Exhibit 14: Long-term EV/revenue

Exhibit 15: Long-term EV/EBITDA

Exhibit 16: Long-term P/E

Source: Refinitiv, Edison Investment Research

Source: Refinitiv, Edison Investment Research

Source: Refinitiv, Edison Investment Research

The share price performances of the major global marketing services groups have been good so far this year, posting gains averaging 4% as the worst fears of Q422 have failed to come to fruition through the FY22 and Q123 reporting seasons. Dentsu’s share price performance had been better up until the Q123 figures, but even post the correction has gained 7% year-to-date as the market starts to appreciate the value being built with the growth of CT&T in the mix and the greater coherence in the group strategy. This has narrowed the discount of the rating to peers, which now sits at 33% when measured on EV/EBITDA across FY22–24e and averaging 32% on a P/E basis.

Exhibit 17: Valuation of major marketing service holding companies

 

Market cap

Share price perf ytd

EV/revenue (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

Company

(US$m)

(%)

CY23

CY22

CY23

CY24

CY22

CY23

CY24

(%)

Omnicom

18,047

17

1.5

8.8

8.7

8.4

14.1

13.8

12.8

3.1

WPP

18,829

9

1.6

9.6

8.9

8.3

16.1

14.1

12.4

2.5

Interpublic

15,530

5

1.8

9.4

8.8

8.6

15.2

15.0

14.2

2.7

Publicis

18,846

10

1.8

8.0

7.4

7.2

13.0

12.1

11.7

4.6

Hakuhodo

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

Dentsu

10,938

7

1.0

6.0

5.5

4.9

10.7

8.6

9.1

2.6

Premium/(discount)

 

2%

(27)%

(30)%

(33)%

(37)%

(29)%

(38)%

(30)%

(11)%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 18 August 2023.

If parity were to be achieved against peers across an average of these metrics, the share price would be ¥5,403, compared with the current price of ¥4,165.

As a sense check, we also carried out a DCF, using a WACC of 9.0% and a terminal growth rate of 2.0%. These are fairly standard assumptions for stocks that Edison follows but may be overly conservative in the case of Dentsu, given that the bank lending rate in Japan is currently sitting at 1.30%.

Exhibit 18: DCF (¥/share) at varying WACC and terminal growth rate assumptions

Terminal growth rate

0.0%

1.0%

2.0%

3.0%

4.0%

WACC

11.0%

4,460

4,644

4,869

5,150

5,512

10.5%

4,658

4,869

5,129

5,459

5,890

10.0%

4,877

5,119

5,422

5,812

6,332

9.5%

5,119

5,400

5,756

6,221

6,855

9.0%

5,389

5,716

6,137

6,698

7,484

8.5%

5,692

6,076

6,578

7,263

8,253

8.0%

6,034

6,488

7,094

7,943

9,215

7.5%

6,423

6,965

7,705

8,775

10,455

7.0%

6,868

7,523

8,441

9,816

12,109

6.5%

7,385

8,185

9,341

11,158

14,428

Source: Edison Investment Research

This exercise produces a figure of ¥6,137, reflecting significant potential upside to the current share price.

Financials

The relevant top line for Dentsu and its peers is that of group revenue less pass-through costs, and we will refer to this simply as revenue.

Exhibit 19: Revenue by region, group operating margin FY16–24e

Source: Denstu accounts, Edison Investment Research

We show here the longer-term record, separating out the regional reporting, which was previously agglomerated as Dentsu International. Immediately obvious from this exhibit is the impact of the COVID-19 pandemic on revenues, most notably in FY20, with a significant bounceback in FY21 and FY22. For the period FY16–FY22, the revenue CAGR was 3.2% for Japan, which is actually a strong showing against the underlying GDP performance of -0.07% over the same interval, although not all this growth was organic.

The US results have been very much shaped by the acquisition of Merkle, where a majority stake was acquired in 2016 and sole ownership achieved in 2020. The revenue CAGR for the US operations is 12.1% over the period FY16–22. For EMEA, the CAGR is 6.4%.

H123 results

Looking at more recent periods, the prior year comparators have a distortive effect, particularly in Q322, with Q321 having been the period with the Tokyo Olympics. We discussed the Q123 figures in our May update note, again pointing out the impact of demanding Q122 comparators. The Americas’ performance was restrained by weak demand from the major tech companies.

This has continued into Q223, with Japan the only region to deliver organic growth of 1.4% in the quarter, as group organic growth fell by 4.7%. The positive performance in Japan was driven by double-digit growth in the CT&T business, with robust levels of client spend in the financial, transportation and household products sectors. Advertising spend was down year-on-year given strong prior year comparators as a cautious approach from clients continued. Given the weaker Q123 period in Japan, H123 organic revenue growth was 1.4%.

Weak demand from tech companies in the Americas in Q123 continued through to Q223 as organic revenue dropped by 7.4%, resulting in an H123 organic growth decline of 6.2% against tougher comparators. Dentsu appointed Michael Komasinski as CEO of dentsu Americas in June, from his position as CEO of CXM International Markets and previously as global CEO of Merkle, in order to put further impetus on executing on the integrated growth strategy.

Denstu flagged a one-off financial impact in Q223 in the EMEA region, relating to a complex transformation issue within the DACH cluster. This resulted in a 12.7% organic revenue decline in the region in Q223, which fed through to an H123 fall of 5.2%. Management noted that without this impact, EMEA would have reported positive organic revenue growth for the first half. The region reported a number of new client wins in Q223, including Carlsberg and Netflix UK, across Media, CXM and Creative.

Performance in APAC continued to be hindered by a weak macroeconomic environment in China, in which Dentsu has a greater client weighting towards more cyclical companies. India was weaker due to client losses in Media in the quarter, although the appointment of a new leadership team, Anita Kotwani in Media and CEO Harsha Razdan, has resulted in more recent client wins. Performance in South-East Asia continues to be held back by a weak Indonesia, despite a strong quarter in Vietnam.

A summary of the quarterly organic growth rates is shown in Exhibit 19 below.

Exhibit 20: Organic growth by quarter, Q122–Q223 (%)

Segment/region

FY22 % group revenues less passthrough costs (ex-Russia)

Q122

Q222

Q322

Q422

FY22

Q123

Q223

Japan

39

+10.0

+7.9

(15.1)

+1.7

+0.4

(0.2)

3.4

Americas

29

+13.4

+9.6

+0.7

+2.3

+6.1

(4.9)

(7.4)

EMEA

22

+3.3

+4.9

+9.2

+4.4

+5.1

EMEA ex Russia

+5.3

+8.9

+15.7

+8.7

+9.7

+3.4

(12.7)

APAC

10

+5.2

+4.5

(1.1)

+2.1

+2.5

(7.8)

(7.0)

Dentsu Group

+9.1

+7.3

(4.7)

+2.6

+3.5

Dentsu Group ex Russia

+9.6

+8.2

(3.7)

+3.5

+4.1

(1.6)

(4.7)

Source: Company accounts

In February, management guidance for the current year was for organic revenue growth of 4% and an underlying operating margin of 17.5%, below the prior year to reflect the additional investment in the One dentsu initiative and in systems and operations to support growth in the CT&T areas of the group. This was to translate into underlying basic EPS of ¥461 and a dividend payout of ¥157.

Due to the impact of the DACH issue in Q2, at the interim results in August organic revenue growth guidance was revised to a range of flat to down 2% in FY23. Although the operating margin guidance was also lowered by 50bp to 17% due to the issue in the DACH cluster, EPS and dividend expectations were unchanged as benefits from the One dentsu strategy resulted in lower financing costs. As a result, management expects to reduce its interest costs by ¥4–5bn in FY23 and ¥7.7bn in FY24. The implication is therefore that although organic growth will be muted or in decline, net profit expectations are unchanged as the benefits of One dentsu and the Tag acquisition come through.

The Tag acquisition was completed at end June and we have incorporated its contribution into our modelling. We expect Tag would have lifted the contribution from CT&T from 32% to 34% on a pro forma basis for FY22. Our understanding is that it currently earns margins a couple of percentage points below those achieved by Dentsu Group. Management has stated that the acquisition will be earnings accretive.

Updated forecasts

Exhibit 21: Revised estimates

FY23e

FY24e

¥m

New

Old

% change

New

Old

% change

Net revenue

1,152,546

1,157,817

(0.5)%

1,203,762

1,195,313

0.7%

Underlying operating profit

195,482

203,458

(3.9)%

208,024

219,406

(5.2)%

Underlying operating profit margin

17.0%

17.6%

(61)*

17.3%

18.4%

(107)*

Net income

122,008

120,819

1.0%

132,295

136,386

(3.0)%

Normalised basic EPS (¥)

461

457

1.1%

509

524

(2.9)%

Dividend per share (¥)

156

159

(1.8)%

177

182

(2.9)%

Net cash

106,197

187,936

(43.5)%

157,052

235,434

(33.3)%

Source: Edison Investment Research. Note: *Basis point.

We have tweaked our FY23 and FY24 expectations to reflect both management’s updated guidance and the Tag acquisition. Our modelling continues to be a little more conservative than company guidance, with the observation that performance will be more heavily weighted to the second half than is usual (although Q4 is the most substantial for the majority of companies in the marketing services industry). We now assume revenue growth in FY23 of 2.6% (previously 3.7%) at an adjusted operating margin close to guidance at 17.0%. We have included the interest cost reduction made in FY23e of ¥4–5bn, which translates to a forecast EPS number of ¥461 with a dividend of ¥156 (a 34% payout ratio).

To extend the modelling into FY24, we have made assumptions of relatively modest revenue (less cost of sales) growth of 4.4%. We model a 30bp improvement in the adjusted operating margin to 17.3% as the various initiatives start to produce returns. This drives a 10% step up in EPS as we model the annualisation of the interest cost reductions into our forecasts, with the dividend lifted to ¥177 given a payout ratio of 35%. This is below the numbers that we published in May 2023 given the expected decline in operating margin (down 149bp vs our previous expectations), when we modelled FY24 EPS of ¥524, a figure now revised to ¥509.

Transactions support cash flow, with returns to shareholders

While the short-term cash flow is subject to various vacillations, it is more meaningful to show how the balance sheet has been transformed over recent years through the generation and use of cash. To illustrate this more clearly, we have combined the cash flow statements from the years FY16–22 inclusive, as shown below. FY16 predates the launch of the comprehensive review of business operations, which was launched in August 2020.

By doing this, the scale of the transformation and the key elements become more obvious. The main factors to note are:

Property disposals: the largest element by far was the sale and leaseback of the Shiodome building in Tokyo in September 2021. The building, which is a major landmark, had a book value of ¥177bn and a gain of approximately ¥89bn (¥56bn net) was realised (the actual sale price was not disclosed).

Sale of securities: historically, it has been common practice in Japan for companies to hold equity positions in other companies with which they have a commercial relationship. This has not sat comfortably with Western notions of corporate governance. The largest contributor to this cash inflow was the sale of shares in Recruit Holdings in the period up to December 2020, with total receipts of ¥194bn. This unwinding process is now effectively completed.

Exhibit 22: Cumulative cash flow and uses, FY16–22

Source: Dentsu accounts, Edison Investment Research

The largest use of funds over the period has been acquisitions (the figure shown in the exhibit above includes sums raised and spent on subsidiary company holdings). What was then Dentsu Aegis Network bought a majority stake in Merkle in FY16, with total acquisition payments for the group in that year being ¥176bn. Cumulatively across FY17–20, around half of group operating cash flow was spent on acquisitions in a series of smaller deals, often to enhance the Merkle offering. Full ownership of Merkle was brought forward from the original plan to April 2020, although payment was not made until the previously agreed date in Q321, hence the larger acquisition spend in that year. LiveArea was also bought to supplement the Merkle offering in the same year (price undisclosed).

Share buybacks: there have been a number of share buyback programmes over the years, with ¥20bn bought in FY17 and FY19, ¥10bn in FY20, ¥30bn in FY21 and ¥40bn in FY22, with this being the preferred route for return of capital for some group shareholders.

Dividends: other shareholders prefer to receive dividends. As part of the accelerated transformation plan, management outlined a progressive increase in the payout ratio, with a medium-term target of 35%. In FY20, the payout was 28.5% of normalised EPS, increasing to 30.0% in FY21 and 32.0% in FY22. Our modelling assumes Dentsu reaching the 34% payout ratio in the current year.

Our modelling for FY23 and FY24 contains no further share buybacks but now includes the payment for Tag. We model net cash inflow of ¥35.3bn for FY23, which reflects strong operating cash flow of ¥197.7bn offset by a ¥103.1bn investing outflow (including Tag) and a ¥59.2bn financing outflow, of which ¥41.1bn is expected to be dividends paid.

Balance sheet in good shape

Leverage at the end of H123 was 0.2x trailing 12-months EBITDA post the Tag acquisition, which is net debt of ¥36.7bn (from ¥71.3bn of net cash at end FY22). The swing from net cash to net debt predominantly reflects the first quarter (end-Q123 net debt: ¥103.3bn), which is typical of the seasonality of Dentsu’s working capital, predominantly relating to the timing of incentive payments. Given the reduction in net debt between Q123 and Q223, we continue to forecast that Dentsu will return to a net cash position in FY23.

The medium-term range for net leverage set by management at 1.0–1.5x clearly gives plenty of scope for further deals and the M&A pipeline is reportedly healthy. The sum outlined for acquisitions across FY22–24 was ¥250–300bn (US$1.8–2.1bn). Spend in FY22 was ¥41bn and the externally reported price for Tag was £533m (¥98.9bn at current rates), leaving plenty still in the pot.

From ¥54bn of debt at end FY20, the cash flow as described above moved the balance sheet to a net cash position the following year of ¥144bn, with returns to shareholders bringing that total down to ¥71bn at end FY22. Our current modelling shows a net cash build over the year to ¥106.2bn, which as mentioned previously includes the Tag acquisition but contains no provision for additional share buybacks.

Exhibit 23: Financial summary

¥m

2020

2021

2022

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

939,242

1,085,592

1,243,883

1,275,702

1,331,917

Cost of Sales

(104,200)

(109,015)

(126,881)

(123,156)

(128,155)

Net revenue

835,042

976,577

1,117,002

1,152,546

1,203,762

EBITDA

 

 

91,013

196,917

216,831

243,459

256,001

Operating profit (before amort. and excepts.)

 

 

123,979

179,028

203,189

195,482

208,024

Amortisation of acquired intangibles

(31,877)

(29,409)

(28,721)

(40,793)

(48,911)

Exceptionals

(229,631)

93,579

(56,849)

(28,200)

(7,000)

Share-based payments

(3,094)

0

0

0

0

Reported operating profit

(140,625)

241,841

117,617

126,489

152,113

Net Interest

(1,419)

(35,491)

(20,246)

(18,091)

(15,804)

Joint ventures & associates (post tax)

910

2,483

(1,932)

(1,971)

(2,010)

Exceptionals

1

0

5,467

0

0

Profit Before Tax (norm)

 

 

123,471

146,020

186,478

175,420

190,210

Profit Before Tax (reported)

 

 

(141,133)

208,833

100,908

106,427

134,298

Reported tax

(11,162)

(93,979)

(34,982)

(37,249)

(47,004)

Profit After Tax (norm)

78,178

116,255

138,819

126,302

136,951

Profit After Tax (reported)

(152,295)

114,853

65,925

69,177

87,294

Minority interests

(7,299)

(6,463)

(6,077)

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

69,892

109,203

130,037

122,008

132,295

Net income (reported)

(159,594)

108,389

59,847

69,177

87,294

Average Number of Shares Outstanding (m)

279

279

268

264

260

EPS - normalised (¥)

 

 

250

392

485

461

509

EPS - normalised fully diluted (¥)

 

 

249

390

482

459

506

EPS - basic reported (¥)

 

 

(571)

389

223

262

336

Dividend (¥)

71

118

155

156

177

Net revenue growth (%)

(10.4)

16.9

14.4

3.2

4.4

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

10.9

20.2

19.4

21.1

21.3

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

14.8

18.3

18.2

17.0

17.3

BALANCE SHEET

Fixed Assets

 

 

1,475,963

1,377,417

1,423,928

1,478,447

1,469,232

Intangible Assets

820,923

858,748

962,100

1,024,692

1,014,954

Tangible Assets

280,196

173,681

168,859

160,786

161,309

Investments & other

374,844

344,988

292,969

292,969

292,969

Current Assets

 

 

1,924,816

2,343,115

2,317,496

2,480,807

2,601,675

Stocks

23,848

20,661

3,670

4,049

4,213

Debtors

1,293,370

1,500,020

1,578,922

1,712,587

1,788,053

Cash & cash equivalents

530,692

723,541

603,740

633,009

678,247

Other

76,906

98,893

131,164

131,162

131,162

Current Liabilities

 

 

(1,759,071)

(1,971,873)

(2,017,695)

(2,142,475)

(2,191,849)

Creditors

(1,247,172)

(1,465,110)

(1,532,591)

(1,695,111)

(1,715,071)

Tax and social security

(71,228)

(60,960)

(30,894)

(30,894)

(30,894)

Short term borrowings

(72,533)

(93,067)

(95,790)

(95,790)

(95,790)

Other

(368,138)

(352,736)

(358,420)

(320,680)

(350,094)

Long Term Liabilities

 

 

(800,987)

(839,188)

(768,403)

(827,141)

(848,027)

Long term borrowings

(512,274)

(486,122)

(436,639)

(431,022)

(425,405)

Other long term liabilities

(288,713)

(353,066)

(331,764)

(396,119)

(422,622)

Net Assets

 

 

840,721

909,471

955,326

989,638

1,031,031

Minority interests

(63,483)

(64,440)

(75,060)

(79,354)

(79,354)

Shareholders' equity

 

 

777,238

845,031

880,266

910,283

951,677

CASH FLOW

Operating Cash Flow

(55,165)

283,709

175,078

195,197

231,187

Working capital

(22,538)

69,156

(3,519)

28,477

(55,671)

Exceptional & other

213,844

(98,761)

40,156

11,257

4,421

Tax

(34,866)

(103,813)

(115,764)

(37,249)

(47,004)

Net operating cash flow

 

 

101,275

150,291

95,951

197,681

132,933

Capex

(19,948)

318,135

(4,585)

(11,000)

(11,000)

Acquisitions/disposals

(26,585)

(49,671)

(40,873)

(92,125)

(11,487)

Net interest

(16,020)

(14,920)

(18,301)

(18,091)

(15,804)

Equity financing

(10,004)

(30,010)

(40,006)

0

0

Net dividends

(26,513)

(19,128)

(37,895)

(41,131)

(43,348)

Other

141,820

(147,241)

(24,920)

0

0

Net Cash Flow

144,025

207,456

(70,629)

35,334

51,294

Opening net debt/(cash)

 

 

209,871

54,115

(144,352)

(71,311)

(106,197)

FX

(12,071)

23,095

13,932

0

0

Other non-cash movements

23,804

(32,082)

(16,344)

(448)

(439)

Closing net debt/(cash)

 

 

54,115

(144,352)

(71,311)

(106,197)

(157,052)

Source: company accounts, Edison Investment Research

Contact details

Revenue by geography

1-8-1, Higashi-Shimbashi,
inato-ku,
Tokyo 105-7050,
Japan
www.group.dentsu.com/en/

Contact details

1-8-1, Higashi-Shimbashi,
inato-ku,
Tokyo 105-7050,
Japan
www.group.dentsu.com/en/

Revenue by geography

Management team

President & CEO: Hiroshi Igarashi

Vice President & Chief Governance Officer: Arinobu Soga

Hiroshi Igarashi joined the group in 1984 and was appointed as president & CEO in March 2023, having held various previous managerial positions at Dentsu Inc. in the intervening period. As president and CEO, he is accountable for shaping the group’s long-term vision and corporate strategy, leading its effective and sustainable execution while achieving target metrics. Igarashi is, additionally, the president of the Japan Advertising Agencies Association.

Arinobu Soga joined Dentsu Inc in 1988, later becoming CFO and then CEO of Geneon Entertainment USA, a dentsu business. He continued to build his career in Japan and abroad, and was appointed as CFO and director of Dentsu Group Inc in 2020. In his new role as chief governance officer, he will be working closely with group management to ensure the highest levels of corporate governance across the policies, structures and processes of the organisation.

CFO: Nick Priday

Nick Priday was appointed CFO of Dentsu Aegis Network following Dentsu’s acquisition of Aegis Group, where he had been CFO since 2009. Prior to that, he held a range of senior finance roles at Aegis since joining in 2003 and had previously worked for EY for seven years in its technology, media and entertainment practice. Nick was appointed as a director and executive officer of Dentsu Group Inc in March 2018, becoming the first non-Japanese chief financial officer of Dentsu Group in its history. He is responsible for global finance strategy and providing financial expertise to respective divisions.

Management team

President & CEO: Hiroshi Igarashi

Hiroshi Igarashi joined the group in 1984 and was appointed as president & CEO in March 2023, having held various previous managerial positions at Dentsu Inc. in the intervening period. As president and CEO, he is accountable for shaping the group’s long-term vision and corporate strategy, leading its effective and sustainable execution while achieving target metrics. Igarashi is, additionally, the president of the Japan Advertising Agencies Association.

Vice President & Chief Governance Officer: Arinobu Soga

Arinobu Soga joined Dentsu Inc in 1988, later becoming CFO and then CEO of Geneon Entertainment USA, a dentsu business. He continued to build his career in Japan and abroad, and was appointed as CFO and director of Dentsu Group Inc in 2020. In his new role as chief governance officer, he will be working closely with group management to ensure the highest levels of corporate governance across the policies, structures and processes of the organisation.

CFO: Nick Priday

Nick Priday was appointed CFO of Dentsu Aegis Network following Dentsu’s acquisition of Aegis Group, where he had been CFO since 2009. Prior to that, he held a range of senior finance roles at Aegis since joining in 2003 and had previously worked for EY for seven years in its technology, media and entertainment practice. Nick was appointed as a director and executive officer of Dentsu Group Inc in March 2018, becoming the first non-Japanese chief financial officer of Dentsu Group in its history. He is responsible for global finance strategy and providing financial expertise to respective divisions.

Principal shareholders

(%)

Kyodo News

7.03

Nomura Asset Management

6.18

Jiji Press, Ltd.

5.93

Silchester Intl Investors

5.05

SMBC Nikko Securities Inc.

3.08


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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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Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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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.

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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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 £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.

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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Metals & Mining

Alkane Resources — Expanding its resources

Tomingley delivered Q423 gold production of 15,822oz, meeting its quarterly forecasts at an AISC of A$2,174/oz. These results concluded a strong year, with full year production of 70,253oz at an AISC of A$1,602/oz beating original FY23 guidance of 55,000–60,000oz production (at an AISC of A$1,650–1,900/oz), and meeting April 2023 production guidance of 65,000–73,000oz (at an AISC of A$1,550–1,750/oz). Full year gold sales totalled 70,498oz, generating revenue of A$190.5m at an average price of A$2,703/oz. FY24 guidance has been set for Tomingley at 60,000–65,000oz production at an AISC of A$1,750–2,100/oz as Alkane anticipates increased costs in wages, and electricity, fuel and reagent prices. Following Alkane’s updates since our last note in April, we have increased our FY23 EPS estimate by 26.8% to 7.38c (cf 5.82c previously).

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