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Currency in JPY
Last close As at 07/06/2023
JPY4,528.00
▲ −165.00 (−3.52%)
Market capitalisation
JPY1,223,308m
Research: TMT
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.
Dentsu Group |
Edging forecasts to higher end of range |
Q222 results |
Media |
15 August 2022 |
Share price performance
Business description
Next events
Analysts
Dentsu Group is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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 |
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
|
|
Research: Healthcare
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