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Currency in JPY
Last close As at 26/05/2023
JPY4,575.00
▲ −35.00 (−0.76%)
Market capitalisation
JPY1,236,005m
Research: TMT
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.
Dentsu Group |
FY23 ambitions weighted to second half |
Q123 results |
Media |
18 May 2023 |
Share price performance
Business description
Next events
Analysts
Dentsu Group is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
|
|
Research: Financials
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