Dentsu Group — FY23 ambitions weighted to second half

Dentsu Group (TYO: 4324)

Last close As at 20/05/2024

JPY4,174.00

31.00 (0.75%)

Market capitalisation

JPY1,169,815m

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Research: TMT

Dentsu Group — FY23 ambitions weighted to second half

Dentsu Group had demanding Q123 on Q122 comparisons and, with the acquisition contributions, we are not too concerned about the read-across for the rest of FY23, with performance skewed to H2. Progress in Customer Transformation and Technology (CT&T), up 6.7% in Q123 and now 35% of group net revenue, should buoy medium-term growth. Tag, the acquisition announced in March and expected to complete in early Q323 (subject to regulatory clearances), is another step towards the 50% CT&T target. We anticipate a return to margin expansion in FY24 as one-off factors retreat, the transition progresses and cost benefits from the ‘One dentsu’ initiative start to flow. The valuation remains at a marked discount to global peers.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Dentsu Group

FY23 ambitions weighted to second half

Q123 results

Media

18 May 2023

Price

¥4,565

Market cap

¥1,207bn

Net debt (¥bn) at 31 March 2023

103.3

Shares in issue

264.4m

Free float

77.8%

Code

DENN

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.1)

5.0

2.7

Rel (local)

(8.9)

(2.0)

(10.1)

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

H123 results

August 2023

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Dentsu Group is a research client of Edison Investment Research Limited

Dentsu Group had demanding Q123 on Q122 comparisons and, with the acquisition contributions, we are not too concerned about the read-across for the rest of FY23, with performance skewed to H2. Progress in Customer Transformation and Technology (CT&T), up 6.7% in Q123 and now 35% of group net revenue, should buoy medium-term growth. Tag, the acquisition announced in March and expected to complete in early Q323 (subject to regulatory clearances), is another step towards the 50% CT&T target. We anticipate a return to margin expansion in FY24 as one-off factors retreat, the transition progresses and cost benefits from the ‘One dentsu’ initiative start to flow. The valuation remains at a marked discount to global peers.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/21

976.6

146.0

392

118

11.7

2.6

12/22

1,117.0

186.5

485

155

9.4

3.4

12/23e

1,157.8

177.6

457

159

10.0

3.5

12/24e

1,195.3

200.5

524

182

8.7

4.0

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

Limited read-across from Q123

Net revenue in Q123 was up 4.2% year-on-year but down 0.6% at constant currency. The well-publicised travails of the tech sector affected net revenue growth in the Americas (down 4.9%) and in Asia-Pacific (ex-Japan) (down 7.8%), while Europe, the Middle East and Africa (EMEA) posted growth of 3.4% and Japan was broadly flat. CT&T revenues grew by 6.7% across the regions and the pitch pipeline was up 8%, promising further gains to come. Q123 operating margin was down 690bp at 14.1%, but much of this is attributable to the one-off timing effect regarding the payment of incentives in Japan, and guidance for the full year operating margin is maintained at 17.5%.

FY23 EPS guidance maintained

Despite the slower start to FY23, management has retained EPS guidance outlined in February with the FY22 results, albeit with a lower organic net revenue growth rate of 1.0–2.0% (was 4.0%). As well as the benefit of acquisitions, guidance reflects a better financial result from the realignment of debt as the One dentsu initiative removes internal barriers. We have finessed our modelling to reflect these revisions for both FY23 and FY24, built on conservative underlying growth assumptions. We would point out that this does not yet include Tag, which we will incorporate on completion. Tag is the group’s third largest acquisition ever. Revenue benefits should accrue in the short term, with ongoing benefits to the wider group from Tag’s expertise in dynamic content production and personalisation.

Valuation: Sizeable discount persists

Post the Q123 results reaction, Dentsu’s share price is now up 11% year to date, while global marketing service group peers have gained an average of 13%. Dentsu trades at a sizeable discount of 24% when averaged across EV/EBITDA for FY22–24e, which we believe overstates the comparative risk profile.

CT&T boost to Q123 performance

Japan (45% of net group revenue) posted organic revenue down by 0.2% in Q123, after a 10.0% gain in Q122. This masks ‘double-digit’ progress in CT&T, spearheaded through the ISID agency. The advertising market continues to be patchy.

In the Americas (27%), the comps were even more demanding at +13.4% in Q122, which puts a kinder light on the dip of 4.9% in the Q123 net revenue. Here the demand from technology clients reflected their wider issues and there was also some sluggishness in the growth posted from CT&T. However, management attributed this to be more to do with the increasing scale and complexity of the deals being negotiated leading to longer conversion times on the pitch pipeline. Modest growth in Creative through gaining more work with existing clients (known as Accelerator Clients) points to the direction of travel for the wider group.

EMEA (20%) posted the strongest performance, with an increase of 3.4%, boosted by ‘double-digit’ progress in CT&T, including a maiden contribution from Omega, bought in February in Spain, which has extended the group’s Salesforce capabilities. Creative stuttered a little with project delays in the UK and Italy.

Asia-Pacific (8%) recorded organic revenue down 7.8%, again reflecting the impact of uncertainty in the tech sector. A boosted management team is charged with improving the results and continuing a recent improvement in new business wins.

The dip in operating margin from 21.2% in Q122 to 14.1% in Q123 was ascribed by management largely to the timing of incentive recognition (mostly Japan), with no change to full year outlook, which implies strengthening as the year progresses. A heathy new business pipeline should also be supportive here.

Forecast adjustments

We have updated our FY23 and FY24 forecasts following the publication of Dentsu’s FY22 and Q123 results and management’s guidance for FY23, raising our net revenue FY23 expectations from ¥1,115bn to ¥1,158bn. This reflects the record revenue base level delivered in FY22, with growth of 3.7% and is broadly in line with management’s guidance of ¥1,161bn.

After a slower than expected start to FY23, management is now guiding to 1–2% organic net revenue growth for FY23, down from c 4% previously. We have adjusted our forecasts accordingly to reflect the more conservative macroeconomic environment and the subsequent impact on global advertising spend, highlighted in management’s Q123 commentary regarding slower media spending from technology clients, particularly in the Americas. We have tapered down our FY24 net revenue figure to reflect management’s more cautious tone, given the current macroeconomic uncertainty and potential impact on client spend. As such we forecast slower growth of 3.2%, taking net revenue to ¥1,195bn. This may prove overly conservative, given that management reports that the recent acquisitions are growing at over 25%.

Turning to profits, we expect normalised FY23 EBIT to remain broadly flat year-on-year at ¥203bn, reflecting a margin of 17.6% versus management’s guidance of 17.5%. The dip in operating margin from the 18.2% reported in FY22 reflects the ramp up investment in One dentsu, which should drive operational simplification and cost efficiencies. Management remains confident in a return to an underlying operating margin of 18% in FY24. However, we expect a potentially faster return to profitability in FY24 as the efficiencies of the One dentsu initiative are realised and as such forecast normalised operating profit of ¥219bn, a margin of 18.4%. Our estimates fall through to an adjusted basic EPS of ¥457 for FY23, rising to ¥524 in FY24.

Exhibit 1: Adjustments to estimates

¥m

FY23e

FY24e

New

Old

% change

New

Old

% change

Net revenue

1,157,817

1,264,862

(8)%

1,195,313

1,300,000

(8)%

Underlying operating profit

203,458

193,088

5%

219,406

203,691

8%

Underlying operating profit margin

17.6%

15.3%

231*

18.4%

15.7%

269*

Net income

120,819

117,416

3%

136,386

125,010

9%

Normalised basic EPS

457

460

(1)%

524

472

11%

Dividend per share

159

153

3%

182

164

11%

Net cash

187,936

200,768

(6)%

235,434

293,084

(20)%

Source: Edison Investment Research   *Note: Change for margin is in bps

Management’s unchanged three-year targets are for a CAGR of 4–5% organic growth, an 18.0% margin and a 35% pay-out ratio.

Further M&A on the cards

Leverage at the quarter end was 0.52x trailing 12-months EBITDA, which is net debt of ¥103.3bn (from ¥73.4bn of net cash at end FY22). This obviously does not include the cost of Tag, reported externally at US$533m, which would be reflected at the year-end. The swing from net cash to net debt in the first quarter is typical of the seasonality of Dentsu’s working capital, predominantly relating to the timing of incentive payments. As such we continue to forecast Dentsu returning to a net cash position for FY23, however it should be noted that the figure in our financial summary table is prior to the acquisition cost of Tag.

With the medium-term range for net leverage set by management at 1.0–1.5x, this clearly gives plenty of scope for further deals and the M&A pipeline is reportedly healthy.

Valuation

The share price performances of the major global marketing services groups have been good so far this year, posting gains averaging 13% 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 11% 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 24% when measured on EV/EBITDA across FY22–24e and averaging 27% on a P/E basis.

Exhibit 2: Valuation of major marketing service holding companies

Market cap

Ytd

EV/sales (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

Company

(US$m)

(%)

CY23e

CY22

CY23e

CY24e

CY22

CY23e

CY24e

(%)

Publicis

19,405

17

1.5

5.9

6.7

6.4

12.3

10.6

10.1

4.4

Omnicom

18,520

12

1.5

7.7

8.9

8.4

12.8

12.5

11.9

3.2

Interpublic

14,190

8

1.6

7.6

8.4

8.1

14.0

12.5

11.8

3.4

WPP

12,039

8

1.1

6.5

6.8

6.5

13.4

8.8

8.2

4.6

Hakuhodo

4,469

17

0.4

6.5

7.2

6.8

18.0

18.4

17.2

2.1

Peer average

13

1.2

6.9

7.6

7.3

14.1

12.6

11.8

3.5

Dentsu

8,935

10

1.0

5.8

5.5

5.1

9.4

10.0

8.7

3.5

Premium/(discount)

 

-2%

-17%

-15%

-28%

-29%

-33%

-20%

-26%

0%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 16 May 2023.

Exhibit 3: Financial summary

¥m

2020

2021

2022

2023e

2024e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

939,242

1,085,592

1,243,883

1,269,983

1,311,500

Cost of Sales

(104,200)

(109,015)

(126,881)

(112,165)

(116,188)

Net revenue

835,042

976,577

1,117,002

1,157,817

1,195,313

EBITDA

 

 

91,013

196,917

216,831

230,210

246,158

Operating profit (before amort. and excepts.)

 

 

123,979

179,028

203,189

203,458

219,406

Amortisation of acquired intangibles

(31,877)

(29,409)

(28,721)

(40,793)

(48,911)

Exceptionals

(229,631)

93,579

(56,849)

0

0

Share-based payments

(3,094)

0

0

0

0

Reported operating profit

(140,625)

241,841

117,617

162,664

170,495

Net Interest

(1,419)

(35,491)

(20,246)

(23,917)

(16,946)

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

177,570

200,450

Profit Before Tax (reported)

 

 

(141,133)

208,833

100,908

136,777

151,539

Reported tax

(11,162)

(93,979)

(34,982)

(47,872)

(53,039)

Profit After Tax (norm)

78,178

116,255

138,819

127,850

144,324

Profit After Tax (reported)

(152,295)

114,853

65,925

88,905

98,500

Minority interests

(7,299)

(6,463)

(6,077)

(7,032)

(7,938)

Discontinued operations

0

0

0

0

0

Net income (normalised)

69,892

109,203

130,037

120,819

136,386

Net income (reported)

(159,594)

108,389

59,847

81,873

90,563

Average Number of Shares Outstanding (m)

279

279

268

265

260

EPS - normalised (¥)

 

 

250

392

485

457

524

EPS - normalised fully diluted (¥)

 

 

249

390

482

454

521

EPS - basic reported (¥)

 

 

(571)

389

223

309

348

Dividend (¥)

71

118

155

159

182

Net revenue growth (%)

(10.4)

16.9

14.4

3.7

3.2

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

10.9

20.2

19.4

19.9

20.6

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

14.8

18.3

18.2

17.6

18.4

BALANCE SHEET

Fixed Assets

 

 

1,475,963

1,377,417

1,423,928

1,427,497

1,439,507

Intangible Assets

820,923

858,748

962,100

973,742

985,229

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

2,554,506

2,652,255

Stocks

23,848

20,661

3,670

3,688

3,820

Debtors

1,293,370

1,500,020

1,578,922

1,704,908

1,760,644

Cash & cash equivalents

530,692

723,541

603,740

714,748

756,629

Other

76,906

98,893

131,164

131,162

131,162

Current Liabilities

 

 

(1,759,071)

(1,971,873)

(2,017,695)

(2,134,875)

(2,165,559)

Creditors

(1,247,172)

(1,465,110)

(1,532,591)

(1,687,511)

(1,688,781)

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)

(842,460)

(853,822)

Long term borrowings

(512,274)

(486,122)

(436,639)

(431,022)

(425,405)

Other long term liabilities

(288,713)

(353,066)

(331,764)

(411,438)

(428,417)

Net Assets

 

 

840,721

909,471

955,326

1,004,668

1,072,381

Minority interests

(63,483)

(64,440)

(75,060)

(82,092)

(90,030)

Shareholders' equity

 

 

777,238

845,031

880,266

922,576

982,351

CASH FLOW

Operating Cash Flow

(55,165)

283,709

175,078

204,322

227,202

Working capital

(22,538)

69,156

(3,519)

28,916

(54,598)

Exceptional & other

213,844

(98,761)

40,156

6,883

563

Tax

(34,866)

(103,813)

(115,764)

(47,872)

(53,039)

Net operating cash flow

 

 

101,275

150,291

95,951

192,249

120,128

Capex

(19,948)

318,135

(4,585)

(11,000)

(11,000)

Acquisitions/disposals

(26,585)

(49,671)

(40,873)

1,275

(11,487)

Net interest

(16,020)

(14,920)

(18,301)

(23,917)

(16,946)

Equity financing

(10,004)

(30,010)

(40,006)

0

0

Net dividends

(26,513)

(19,128)

(37,895)

(41,534)

(32,750)

Other

141,820

(147,241)

(24,920)

0

0

Net Cash Flow

144,025

207,456

(70,629)

117,073

47,945

Opening net debt/(cash)

 

 

209,871

54,115

(144,352)

(71,311)

(187,936)

FX

(12,071)

23,095

13,932

0

0

Other non-cash movements

23,804

(32,085)

(16,344)

(448)

(447)

Closing net debt/(cash)

 

 

54,115

(144,352)

(71,311)

(187,936)

(235,434)

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Dentsu Group and prepared and issued by Edison, in consideration of a fee payable by Dentsu Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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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.

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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

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United States

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20 Red Lion Street

London, WC1R 4PS

United Kingdom

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