Dentsu Group — Edging forecasts to higher end of range

Dentsu Group (TYO: 4324)

Currency in JPY

Last close As at 26/01/2023

JPY4,300.00

50.00 (1.18%)

Market capitalisation

JPY1,161,710m

Research: TMT

Dentsu Group — Edging forecasts to higher end of range

Dentsu has had a strong Q222, reporting organic revenue growth of 8.2% (7.9% including Russia). Customer Transformation & Technology (CT&T) is the main engine of growth and represents 32.3% of group net revenue, up from 31.5% in Q122. We would expect this segment to be more resilient should a deteriorating H222 macro environment stall advertising momentum. Management is now guiding to the top end of the previously cited 4–5% revenue growth range and we have edged our forecasts ahead, with earnings also set to benefit from a lower tax charge than expected. The shares have outperformed the peer set in the year-to-date, narrowing the discount at which they trade to 12% on current year EV/EBITDA.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Dentsu Group

Edging forecasts to higher end of range

Q222 results

Media

15 August 2022

Price

¥4,700

Market cap

¥1,277,930m

US$1:¥133.32

Net cash (¥bn) at end June 2022

47.1

Shares in issue

271.9m

Free float

77.8%

Code

DENN

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.6

5.8

13.1

Rel (local)

10.4

(1.9)

11.9

52-week high/low

¥5,020

¥3,550

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

Q322 results

November 2022

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Max Hayes

+44 (0)20 3077 5700

Dentsu Group is a research client of Edison Investment Research Limited

Dentsu has had a strong Q222, reporting organic revenue growth of 8.2% (7.9% including Russia). Customer Transformation & Technology (CT&T) is the main engine of growth and represents 32.3% of group net revenue, up from 31.5% in Q122. We would expect this segment to be more resilient should a deteriorating H222 macro environment stall advertising momentum. Management is now guiding to the top end of the previously cited 4–5% revenue growth range and we have edged our forecasts ahead, with earnings also set to benefit from a lower tax charge than expected. The shares have outperformed the peer set in the year-to-date, narrowing the discount at which they trade to 12% on current year EV/EBITDA.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(
¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/20

835.0

123.5

249

71

18.9

1.5

12/21

976.6

146.0

389

118

12.1

2.5

12/22e

1,100.0

172.8

440

141

10.7

3.0

12/23e

1,135.5

181.4

470

158

10.0

3.4

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

Good underlying progress boosted by currency

Overall group H122 net revenue was up 17.8%, boosted from 11.5% by favourable shifts in currencies. This was made up of +14.6% at Dentsu Japan Network (DJN), of which 9.0% was organic, and a gain of 20.2% (+9.5% at constant currency) at Dentsu International (DI), where organic growth was 7.6%, or 8.2% excluding Russia. The focus on organisational simplification and the increasing use of off- and near-shoring underpins the operating margin, where guidance remains for 17.7% for the year (FY21: 18.3%) despite the dilutive impact of Russia, which is now set to be sold to local partners. A lower tax charge at DI is further benefits EPS, leading to a 6% increase in our expected FY22 dividend given a pay-out ratio of 32%.

M&A focus firmly on CT&T

Dentsu continues to make acquisitions to bolster and broaden its CT&T proposition. While individually modest, they contributed ¥14.4m of net revenue in H122. Ignition Point, a DJN subsidiary from May, grew 30% in Q222, winning new clients and with a strong pipeline. Two CT&T acquisitions for DI are announced with these results, strengthening Dentsu’s position as Salesforce’s largest agency partner. The M&A pipeline remains strong and the group had net cash of ¥47.1m at end June. Management’s medium-term target is leverage of 1.0–1.5x underlying EBITDA.

Valuation: Discount persists

While the other large marketing service companies have underperformed the market year-to-date, retrenching by 18% on average, Dentsu’s share price has increased by 13% over the same period. Nevertheless, across FY21–23e, the shares still sit at a valuation discount to the peer set of 12% on EV/EBITDA and 4% on P/E. Given the improving quality of business with more emphasis on digital transformation, we still believe this differential remains overstated.

Summary performance and estimate revisions

Having edged our numbers up with the full year report in February, and again in May, we now do so again, buoyed by the good performance in Q222. The revisions, though, are modest and assume that like-for-like net revenue growth across H222 will be lower, reflecting the tougher comparatives for DJN against the period including the Tokyo Olympics.

An interim dividend of ¥70.25 has been declared, up 8% on prior year, with guidance for the year at ¥130 -140.5. Our estimate is at the top end of this range, up from our previous forecast of ¥133.

Exhibit 1: Summary revisions to numbers

Net revenue (¥bn)

Underlying operating profit (¥bn)

EPS (¥)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2022e

1,080.0

1,100.0

+2

191.2

194.7

+2

414

442

+7

2023e

1,123.0

1,135.5

+1

198.6

201.9

+2

445

473

+6

Source: Edison Investment Research

DJN (42% of group net revenue)

Organic growth was 9.0% in H122 (7.9% in Q222). The largest constituent, DENTSU Inc., posted 4.2% organic improvement in net revenue, reflecting a good Japanese advertising market. CT&T advanced to 27.5% of segmental revenues, which will be boosted in H222 by the inclusion of revenues from Ignition Point.

DJN’s digital advertising market presence has been scaled up with the addition of Septeni, bought in Q122 and which reported H122 organic growth of 11.9%.

The continuing programme of rationalisation and simplification, as well as the shift in mix, helped to deliver an improvement in operating margin up 3.6% to 26.5% for the half year.

DI (58% of group revenue)

Organic growth of 7.0% in Q222 resulted in H122 progress of 7.6%, which would have been 8.48 not including Russia. The strongest performance was in the Americas, where H122 organic growth was 11.4%, with both the Media offering and CT&T reporting in double digits.

Media grew by 5.8% in the half-year, benefiting from its exposure to larger clients with substantial budgets. Management reports that it has a robust pipeline, which is 75% offensive (ie not re-pitching for existing clients). Creative, which is around 17% of the segmental revenues, is still struggling to find its way back to growth. This should be more likely now it has been reshaped into a unified offering under new leadership.

The CXM offering continues to be the main growth driver, with organic growth of 13.6% and in double digits across all three regional elements: Americas; Europe, Middle East and Africa (EMEA); and Asia-Pacific (ex Japan).

The operating margin was down 0.3% at 11.9% against H121, again diluted by Russia, without which it would have increased by 0.3% to 12.5%.

M&A, buybacks set to continue

With a maintained target of a mid-term range for net debt/EBITDA of 1.0–1.5x, there is plenty of scope for continued M&A activity to drive the CT&T contribution up towards the 50% level ‘over time’, despite a progressive dividend policy (35% pay-out by FY24) and share buybacks. By the end of July, Dentsu Group had bought back just below 8.0m shares, spending ¥35.4bn of the ¥40bn indicated for the programme.

The M&A market is clearly competitive, and management is not afraid to walk away from deals where the economics do not stack up. Within Japan, DJN has a clear advantage, being an incumbent of scale and with over 6k clients as potential referral partners. With this announcement, Dentsu has also announced two further acquisitions in CT&T for DI (a UK and Ireland Salesforce consultancy), Pexlify, and a global consultancy delivering solutions in mobile, cloud and experience, Extentia (prices undisclosed). Management reports that the M&A pipeline remains strong.

Net cash at end Q222 was ¥47.1bn (end Q122 ¥36.7bn), down from ¥144.4bn at the FY21 year-end.

Valuation: Discount to peers despite outperformance

Exhibit 2: Valuation of global major marketing service companies

 

Market
cap

Share price change ytd

EV/sales (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

Company

(US$m)

(%)

CY21

CY21

CY22

CY23

CY21

CY22

CY23

(%)

Omnicom

14.420

-2

1.3

6.8

7.5

7.5

11.5

10.7

10.5

3.8

WPP

10,670

-28

1.3

8.5

7.1

6.9

21.3

8.6

8.0

2.8

Interpublic

11,360

-21

1.4

8.4

6.9

6.9

15.7

10.7

10.8

2.9

Publicis

13,244

-10

1.4

7.0

5.9

5.8

13.9

8.6

8.4

0.6

Hakuhodo

3,931

-30

0.6

5.8

6.2

5.9

10.5

16.7

15.5

2.1

Peer average

 

-18

1.2

7.3

6.7

6.6

14.6

11.1

10.6

2.4

Dentsu

9,783

13

1.1

6.4

5.9

5.7

12.1

10.7

10.0

2.5

Premium/(discount)

 

31%

-3%

-12%

-12%

-13%

-17%

-4%

-6%

4%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 11 August 2022, based on $1:¥133.3.

The better share price performance compared to peers has narrowed the valuation gap further from 24% to 12% on EV/EBITDA since our May report. On a P/E basis, the valuation is close to the peer set.

Exhibit 3: Financial summary

¥'m

2020

2021

2022e

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

939,243

1,085,592

1,250,000

1,300,000

1,325,000

Cost of Sales

(104,201)

(109,015)

(150,000)

(164,501)

(167,676)

Net revenue

835,042

976,577

1,100,000

1,135,499

1,157,324

EBITDA

 

 

90,063

195,006

210,726

217,909

223,750

Operating profit (before amort. and excepts.)

 

 

123,979

179,028

194,748

201,931

207,772

Amortisation of acquired intangibles

(31,877)

(29,409)

(31,379)

(31,379)

(31,379)

Exceptionals

(229,631)

94,368

0

0

0

Share-based payments

(3,094)

0

0

0

0

Reported operating profit

(140,625)

241,841

163,369

170,551

176,393

Net Interest

(1,419)

(35,491)

(32,139)

(30,924)

(30,573)

Joint ventures & associates (post tax)

910

2,484

10,200

10,404

10,612

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

123,470

146,021

172,809

181,411

187,812

Profit Before Tax (reported)

 

 

(141,134)

208,834

141,430

150,031

156,432

Reported tax

(11,162)

(93,979)

(37,055)

(42,009)

(43,801)

Profit After Tax (norm)

78,177

116,256

127,533

130,616

135,224

Profit After Tax (reported)

(152,296)

114,855

104,375

108,023

112,631

Minority interests

(7,299)

(6,463)

(7,014)

(7,184)

(7,437)

Discontinued operations

0

0

0

0

0

Net income (normalised)

69,891

109,205

118,776

123,432

127,787

Net income (reported)

(159,595)

108,392

97,361

100,839

105,194

Average Number of Shares Outstanding (m)

279

279

268

261

261

EPS - normalised (sen)

 

 

250

392

442

473

490

EPS - normalised fully diluted (sen)

 

 

249

389

440

470

487

EPS - basic reported (¥)

 

 

(571)

389

363

386

403

Dividend (¥)

71

118

141

158

170

Net revenue growth (%)

(10.4)

16.9

12.6

3.2

1.9

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

10.8

20.0

19.2

19.2

19.3

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

14.8

18.3

17.7

17.8

18.0

BALANCE SHEET

Fixed Assets

 

 

1,439,542

1,305,203

1,438,225

1,448,247

1,454,031

Intangible Assets

784,502

858,748

994,254

1,006,760

1,015,028

Tangible Assets

280,196

88,682

86,198

83,714

81,230

Investments & other

374,844

357,773

357,773

357,773

357,773

Current Assets

 

 

1,924,816

2,214,088

2,433,328

2,553,772

2,654,154

Stocks

23,848

26,880

36,986

42,741

43,566

Debtors

1,293,370

1,386,767

1,596,787

1,660,658

1,692,594

Cash & cash equivalents

530,692

723,541

722,656

773,473

841,095

Other

76,906

76,899

76,899

76,899

76,899

Current Liabilities

 

 

(1,759,071)

(1,883,417)

(2,097,372)

(2,162,441)

(2,194,975)

Creditors

(1,247,172)

(1,412,757)

(1,626,712)

(1,691,781)

(1,724,315)

Tax and social security

(71,228)

(71,228)

(71,228)

(71,228)

(71,228)

Short term borrowings

(72,533)

(72,533)

(72,533)

(72,533)

(72,533)

Other

(368,138)

(326,899)

(326,899)

(326,899)

(326,899)

Long Term Liabilities

 

 

(800,985)

(726,400)

(720,783)

(715,166)

(709,549)

Long term borrowings

(512,274)

(506,657)

(501,040)

(495,423)

(489,806)

Other long term liabilities

(288,711)

(219,743)

(219,743)

(219,743)

(219,743)

Net Assets

 

 

804,302

909,474

1,053,397

1,124,412

1,203,661

Minority interests

(63,483)

(64,440)

(71,454)

(78,638)

(86,076)

Shareholders' equity

 

 

740,819

845,034

981,943

1,045,774

1,117,586

CASH FLOW

Operating Cash Flow

(55,166)

254,221

188,787

197,389

203,790

Working capital

(22,538)

69,155

(6,170)

(4,558)

(226)

Exceptional & other

213,845

(59,307)

2,730

1,515

1,568

Tax

(47,828)

(149,880)

(69,194)

(72,933)

(74,374)

Net operating cash flow

 

 

88,313

114,189

116,154

121,413

130,757

Capex

(19,948)

305,200

(932)

(11,000)

(11,000)

Acquisitions/disposals

(26,585)

(49,672)

(13,725)

(15,000)

(10,762)

Net interest

0

0

0

0

0

Equity financing

(10,004)

(30,010)

(40,000)

0

0

Dividends

(29,574)

(23,473)

(34,577)

(38,978)

(35,322)

Other

141,820

(108,773)

(10,043)

0

0

Net Cash Flow

144,022

207,461

16,877

56,435

73,673

Opening net debt/(cash)

 

 

209,870

54,115

(144,351)

(149,083)

(205,517)

FX

(12,071)

(8,995)

(12,145)

0

0

Other non-cash movements

23,804

0

0

0

(435)

Closing net debt/(cash)

 

 

54,115

(144,351)

(149,083)

(205,517)

(278,756)

Source: Company accounts, Edison Investment Research

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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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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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Sequana Medical — DSR 2.0 moving forward

Following sustained positive effects from the SAHARA I study in restoring diuretic response (DR) in heart failure (HF) patients with persistent congestion, Sequana will focus on advancing its Direct Sodium Removal (DSR) programme using its second-generation product (DSR 2.0) as applied through a peritoneal catheter (‘short-term DSR’). This should provide a more straightforward regulatory pathway than the alfapump DSR combination approach studied previously. The company continues to expect to report top-line data for its North American POSEIDON study of alfapump in recurrent and refractory ascites (RRA) in Q422 and it plans to submit a US premarket approval (PMA) application in H223. We have reassessed the potential market opportunity for DSR 2.0, and revised our clinical development timeline assumptions, pushing back our potential DSR launch forecast from H226 to 2028. We now derive an equity valuation per basic share of €12.38 for Sequana Medical, versus €13.12 previously.

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