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Currency in JPY
Last close As at 09/06/2023
JPY4,520.00
▲ −8.00 (−0.18%)
Market capitalisation
JPY1,221,146m
Research: TMT
Dentsu has edged up its FY22 guidance for organic growth to a range of 4–5%, from 4% previously, following a strong Q122 performance, particularly at Dentsu International (DI). Customer Transformation & Technology (CT&T) continues to build, accounting for 31.5% of group net revenues in the period. Management remains confident of a good runway of growth. Group operating margin rose from 20.2% in Q121 to 21.2%, up 140bps at constant currency. FY22 guidance remains for a 17.7% operating margin, implying some circumspection on costs for the remainder of the year.
Dentsu Group |
Guidance edged up |
Q122 results |
Media |
18 May 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 edged up its FY22 guidance for organic growth to a range of 4–5%, from 4% previously, following a strong Q122 performance, particularly at Dentsu International (DI). Customer Transformation & Technology (CT&T) continues to build, accounting for 31.5% of group net revenues in the period. Management remains confident of a good runway of growth. Group operating margin rose from 20.2% in Q121 to 21.2%, up 140bps at constant currency. FY22 guidance remains for a 17.7% operating margin, implying some circumspection on costs for the remainder of the year.
Year end |
Net revenue (¥bn) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/20 |
835.0 |
123.5 |
249 |
71 |
17.7 |
1.6 |
12/21 |
976.6 |
146.0 |
389 |
118 |
11.3 |
2.7 |
12/22e |
1,080.0 |
168.6 |
414 |
133 |
10.7 |
3.0 |
12/23e |
1,123.0 |
176.6 |
445 |
149 |
9.9 |
3.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Good Q122 progress
Group net revenue grew from ¥222.5bn in Q121 to ¥258.9bn, with organic growth strongest in the Americas at +13.4%, where its performance in CXM (customer experience management) was particularly positive, up 27.7% year-on-year (+14.8% organic). Dentsu Japan Network (DJN) increased revenues by 10.0% organic, boosted particularly by progress in its digital activities, also reflected in the higher operating margin of 35.8% (Q121: 32.7%). Operating margins at DI dipped to 9.9% (Q121: 10.3%), but this includes the Russian operation (which is being transferred to local partners). Excluding Russia, which we estimate generated around ¥0.9bn in the quarter, DI’s net revenues would have been up 9.2%, rather than 8.4%, with an operating margin of 10.4%. Full year guidance on operating margin is held at 22.0% for DJN and 15.9% at DI. We have edged our FY22 net revenue forecast up from ¥1,059bn to ¥1,080bn, lifting our EPS forecast from ¥404 to ¥415.
Emphasis on Customer Transformation & Technology
Management remains confident on the prospects for CT&T, which should be much less exposed to any retrenchment of pure advertising budgets if global economies come under increasing pressure. In these circumstances, companies are more likely to need to accelerate digital transformation programmes. CT&T generates high-quality revenue, with more recurring income, a deeper reach into client budgets and the ability to manage costs through near- and off-shoring resourcing.
Valuation: Discount persists
While the other large marketing service companies have underperformed the market year-to-date, retrenching by 12% on average, Dentsu’s share price has increased by 6% over the same period. Nevertheless, across FY21–23e, the shares still sit at a substantial valuation discount to the peer set of 25% on EV/EBITDA and 9% on P/E. Given the improving quality of business with more emphasis on digital transformation, we still believe this differential is overstated.
Estimates again edged ahead
Having edged our numbers up with the full year report in February, we now do so again, buoyed by the good performance in Q122. The revisions, though, are modest and assume that like-for-like net revenue growth across Q222–Q422 will be less than that achieved for Q122 given the much tougher comparatives through the remainder of the year. This is especially the case in Q322 in DJN, where the comparison period encompassed the Tokyo Olympics. The group has changed the terminology for its main revenue metric from ‘Revenue less cost of sales’ to the simpler ‘Net revenue’, with no change to the underlying numbers.
Exhibit 1: Summary revisions to numbers
Net revenue (¥bn) |
Underlying operating profit (¥bn) |
EPS (¥) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2022e |
1,059.2 |
1,080.0 |
+2 |
187.9 |
191.2 |
+2 |
404 |
414 |
+3 |
2023e |
1,102.2 |
1,123.0 |
+2 |
195.2 |
198.6 |
+2 |
423 |
445 |
+5 |
Source: Edison Investment Research
DJN trading and outlook (46% group net revenue)
CT&T increased to 25.8% of segmental net revenue, up from 23.7% in Q121. The segment delivered strongly across its digital activities, with iSiD delivering 17.7% organic growth, the newly consolidated Septeni growing almost 14% in Q1 and recently acquired Ignition Point (a CT&T consultancy) showing annual growth of 30%, all boosting DJN’s positioning as the leader in digital advertising in the Japanese market. There is still progress in the more traditional areas, with TV advertising up by 4.7%. Finance/insurance and healthcare were the strongest client segments, up 36.7% and 40.6%, respectively, while tech, food and beverage and autos (between them 65% of DJN net revenue) were all behind net revenue levels in Q121.
Management guidance remains for full year net revenue growth of 2–3%.
The operating margin increased to 35.8%, up 310bps from Q121. However, management highlights that costs are likely to rise across the rest of the year, which is implicit in the maintained full year guidance for an operating margin of 22%. The simplification of the business continues, with the emphasis on hiring to support the growth in CT&T.
DI trading and outlook (54% group net revenue)
Total net revenue was up by 8.4%, a figure that would have been higher but for the Russian contribution, which we calculate to have been around ¥0.9bn. Stripping this out, net revenues were 9.2% ahead. The strongest growth was within CXM, up by 14.8%, taking the CT&T contribution to 36.4% of the segment, up from 33.6% in Q121. Media net revenues were up 6.4% (led by the performance in the Americas), while Creative net revenues managed to move ahead by 1.4%, with some indication of expanding remits from existing clients. Organic growth in the Americas reporting region was 13.4%, with EMEA at 3.3% and Asia-Pacific at 5.2%. Within EMEA, Denmark and the UK both increased net revenue by double figures, with the performance in Australia within Asia-Pacific also over 10%. Russian revenues were down over 10%.
The strongest sector was again finance/insurance at +47.3%, with food services, transportation, apparel and ‘other’ all growing in excess of 30%. Food and beverage, autos and distribution (37% of DI net revenue) were down on the prior year at constant currency.
Momentum continues to be good in the CT&T, with volumes running 18% above pre-pandemic levels. Across DI the pipeline is reportedly currently standing at around $5bn, of which 70% is offensive (ie not with existing clients), with both the pipeline and the value of average pitches all ahead. Much of the pitch activity is at a local or regional level, rather than the largest global accounts, so tends to be less picked up by the regular industry surveys of net gains and losses. The conversion rate on these pitches is running at around 70%, while the cost of pitching will also be lower than that required for much larger pieces of business.
DI grew its business with its 10 largest clients by 15% in Q122, which supports the broader strategy of preferring a ‘land-and-expand’ approach.
Along with the structural impetus behind CT&T, these factors have given management the confidence to lift the guidance for DI’s net revenue growth from the 4–5% cited in February by 100bps to 5–6%, even though prospects for the consumer economy over the remainder of the year have dampened.
DI’s operating margin slipped slightly in Q122 to 9.9% (Q121: 10.3%), but this was affected by the Russian operations, without which it would have been 10.4%. Guidance for the full year is maintained for an operating margin of 15.9%, flat over the prior year. Management is confident that the structural improvements in the business as CT&T grows, continued rightsizing and near- and off-shoring of resource will help it meet this target.
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% payout by FY24) and share buybacks. By the end of April, Dentsu Group had bought back 2.83m shares, spending ¥13bn 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. Management reports that the M&A pipeline remains strong.
Net cash at end Q122 was ¥36.7bn, down from ¥144.4bn at the FY21 year-end (prior to paying for the latest acquisitions of IgnitionPoint – purchase price undisclosed).
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 |
16,343 |
1 |
1.3 |
8.3 |
7.6 |
7.2 |
11.8 |
11.7 |
10.9 |
3.6 |
WPP |
13,274 |
-13 |
1.1 |
8.1 |
7.0 |
6.4 |
18.6 |
10.9 |
9.7 |
3.1 |
Interpublic |
12,896 |
-15 |
1.4 |
8.7 |
7.4 |
7.0 |
13.0 |
11.8 |
11.1 |
3.6 |
Publicis |
14,453 |
-5 |
1.4 |
7.1 |
6.5 |
6.3 |
13.6 |
10.1 |
9.7 |
4.3 |
Hakuhodo |
4,127 |
-30 |
0.5 |
5.2 |
5.9 |
5.8 |
9.3 |
14.8 |
13.1 |
2.3 |
Peer average |
|
-12 |
1.2 |
7.5 |
6.8 |
6.5 |
13.3 |
11.9 |
10.9 |
3.4 |
Dentsu |
9,401 |
6 |
1.0 |
5.5 |
5.2 |
5.0 |
11.3 |
10.7 |
9.9 |
2.7 |
Premium/(discount) |
|
19% |
-15% |
-26% |
-24% |
-24% |
-15% |
-10% |
-9% |
-22% |
Source: Refinitiv, Edison Investment Research. Note: Prices as at 17 May 2022.
The better share price performance compared to peers has narrowed the valuation gap slightly from 29% to 24% on EV/EBITDA since our February report. On a P/E basis, the valuation is closer to the peer set.
Exhibit 3: Financial summary
¥m |
2020 |
2021 |
2022e |
2023e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
939,243 |
1,085,592 |
1,225,000 |
1,275,000 |
Cost of Sales |
(104,201) |
(109,015) |
(145,000) |
(152,045) |
||
Net revenue |
835,042 |
976,577 |
1,080,000 |
1,122,955 |
||
EBITDA |
|
|
90,063 |
195,006 |
207,128 |
214,528 |
Operating profit (before amort. and excepts.) |
|
|
123,979 |
179,028 |
191,150 |
198,550 |
Amortisation of acquired intangibles |
(31,877) |
(29,409) |
(31,379) |
(31,379) |
||
Exceptionals |
(229,631) |
94,368 |
0 |
0 |
||
Share-based payments |
(3,094) |
0 |
0 |
0 |
||
Reported operating profit |
(140,625) |
241,841 |
159,771 |
167,171 |
||
Net Interest |
(1,419) |
(35,491) |
(32,716) |
(32,351) |
||
Joint ventures & associates (post tax) |
910 |
2,484 |
10,200 |
10,404 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
123,470 |
146,021 |
168,635 |
176,604 |
Profit Before Tax (reported) |
|
|
(141,134) |
208,834 |
137,255 |
145,224 |
Reported tax |
(11,162) |
(93,979) |
(35,365) |
(47,343) |
||
Profit After Tax (norm) |
78,177 |
116,256 |
120,092 |
123,623 |
||
Profit After Tax (reported) |
(152,296) |
114,855 |
101,890 |
97,881 |
||
Minority interests |
(7,299) |
(6,463) |
(6,605) |
(6,799) |
||
Discontinued operations |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
69,891 |
109,205 |
111,744 |
116,823 |
||
Net income (reported) |
(159,595) |
108,392 |
95,285 |
91,082 |
||
Average Number of Shares Outstanding (m) |
279 |
279 |
268 |
261 |
||
EPS - normalised (sen) |
|
|
250 |
392 |
416 |
448 |
EPS - normalised fully diluted (sen) |
|
|
249 |
389 |
414 |
445 |
EPS - basic reported (¥) |
|
|
(571) |
389 |
355 |
349 |
Dividend (¥) |
71 |
118 |
133 |
149 |
||
Net revenue growth (%) |
16.9 |
10.6 |
4.0 |
|||
EBITDA Margin to revenue less pass-through costs (%) |
10.8 |
20.0 |
19.2 |
19.1 |
||
Normalised operating margin to revenue less pass-through costs (%) |
14.8 |
18.3 |
17.7 |
17.7 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
1,439,542 |
1,305,203 |
1,315,971 |
1,323,739 |
Intangible Assets |
784,502 |
858,748 |
874,254 |
886,760 |
||
Tangible Assets |
280,196 |
88,682 |
83,944 |
79,206 |
||
Investments & other |
374,844 |
357,773 |
357,773 |
357,773 |
||
Current Assets |
|
|
1,924,816 |
2,214,088 |
2,411,823 |
2,526,492 |
Stocks |
23,848 |
26,880 |
35,753 |
39,505 |
||
Debtors |
1,293,370 |
1,386,767 |
1,564,851 |
1,628,723 |
||
Cash & cash equivalents |
530,692 |
723,541 |
734,320 |
781,365 |
||
Other |
76,906 |
76,899 |
76,899 |
76,899 |
||
Current Liabilities |
|
|
(1,759,071) |
(1,883,417) |
(2,064,838) |
(2,129,907) |
Creditors |
(1,247,172) |
(1,412,757) |
(1,594,178) |
(1,659,247) |
||
Tax and social security |
(71,228) |
(71,228) |
(71,228) |
(71,228) |
||
Short term borrowings |
(72,533) |
(72,533) |
(72,533) |
(72,533) |
||
Other |
(368,138) |
(326,899) |
(326,899) |
(326,899) |
||
Long Term Liabilities |
|
|
(800,985) |
(726,400) |
(720,783) |
(715,166) |
Long term borrowings |
(512,274) |
(506,657) |
(501,040) |
(495,423) |
||
Other long term liabilities |
(288,711) |
(219,743) |
(219,743) |
(219,743) |
||
Net Assets |
|
|
804,302 |
909,474 |
942,173 |
1,005,158 |
Minority interests |
(63,483) |
(64,440) |
(71,045) |
(77,844) |
||
Shareholders' equity |
|
|
740,819 |
845,034 |
871,128 |
927,314 |
CASH FLOW |
||||||
Operating Cash Flow |
(55,166) |
254,221 |
184,613 |
192,582 |
||
Working capital |
(22,538) |
69,155 |
(5,536) |
(2,555) |
||
Exceptional & other |
213,845 |
(59,307) |
3,307 |
2,942 |
||
Tax |
(47,828) |
(149,880) |
(68,081) |
(79,694) |
||
Net operating cash flow |
|
|
88,313 |
114,189 |
114,303 |
113,275 |
Capex |
(19,948) |
305,200 |
1,322 |
(8,746) |
||
Acquisitions/disposals |
(26,585) |
(49,672) |
(13,725) |
(15,000) |
||
Net interest |
0 |
0 |
0 |
0 |
||
Equity financing |
(10,004) |
(30,010) |
(40,000) |
0 |
||
Dividends |
(29,574) |
(23,473) |
(33,569) |
(36,867) |
||
Other |
141,820 |
(108,773) |
(11,935) |
0 |
||
Net Cash Flow |
144,022 |
207,461 |
16,396 |
52,662 |
||
Opening net debt/(cash) |
|
|
209,870 |
54,115 |
(144,351) |
(160,747) |
FX |
(12,071) |
(8,995) |
0 |
0 |
||
Other non-cash movements |
23,804 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
54,115 |
(144,351) |
(160,747) |
(213,409) |
Source: Company accounts, Edison Investment Research
|
|
Research: TMT
Tinexta reported a good start to the year with continued strong organic revenue growth in Q122. This was further boosted by first-time contributions from acquisitions completed through FY21 and into FY22, which were also helpful to the total margin. Management re-iterated its financial guidance for FY22 while recognising the greater macroeconomic and inflationary pressures than when the guidance was made earlier in the year. The recent share price weakness means the stock is trading at a substantial discount to our unchanged DCF-based valuation of €42/share.
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