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JPY9,205m
Research: TMT
Dentsu’s Q323 trading update describes demanding trading conditions with continuing spending constraint from customers in technology and finance, and ongoing delays to larger digital transformation projects. Full year organic revenue guidance is revised to -5% (from 0% to -2%), with an operating margin of 13.5%, depressed by one-off factors from 15.0%. The outlook is improving, albeit patchily, and initiatives to streamline the business and structure it more effectively to meet client needs should benefit the operating margin in FY24 and beyond.
Dentsu Group |
One dentsu initiative set to improve efficiency |
Q3 trading update |
Media |
16 November 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’s Q323 trading update describes demanding trading conditions with continuing spending constraint from customers in technology and finance, and ongoing delays to larger digital transformation projects. Full year organic revenue guidance is revised to -5% (from 0% to -2%), with an operating margin of 13.5%, depressed by one-off factors from 15.0%. The outlook is improving, albeit patchily, and initiatives to streamline the business and structure it more effectively to meet client needs should benefit the operating margin in FY24 and beyond.
Year end |
Net revenue (¥bn) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/21 |
976.6 |
146.0 |
392 |
118 |
10.3 |
2.9 |
12/22 |
1,117.0 |
186.5 |
485 |
155 |
8.3 |
3.8 |
12/23e |
1,122.3 |
121.9 |
335 |
137 |
12.1 |
3.4 |
12/24e |
1,172.6 |
162.9 |
436 |
152 |
9.3 |
3.8 |
12/25e |
1,213.6 |
179.0 |
650 |
162 |
6.2 |
4.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Q3 tough trading and one-offs
Organic revenue declined by 6.0% in Q323, resulting in an organic revenue decline for the first nine months of 2023 (9M23) of 4.1%. Japan was the one region to post progress at the organic level, of 1.9%. In Europe, the Middle East and Africa (EMEA), where the organic revenue decline was 9.7%, there were further repercussions from the DACH cluster issues that arose in late Q2 (see our August outlook note), but management states these are now fully resolved. Full year guidance has been revised. The downgrade to operating margin guidance, to 13.5%, also takes into account the one-off elements of severance payments and the costs associated with the DACH cluster. Excluding these, the operating margin is now guided to 15.0%, from 17.0% previously. We would expect margins to start expanding again from FY24 and we have pencilled in an improvement to 15.4%, which may prove overly cautious, dependent on the timing of improvement in demand levels.
One dentsu initiative progressing
The breakdown of internal silos is continuing. It is already having a positive impact on existing and potential clients, with better prioritisation leading to higher pitch conversion. Dentsu has identified 11 ‘accelerator clients’, with dedicated global account leadership to grow and deepen the relationships. Fewer internal barriers also facilitate the use of networked talent, not restricted by geography or agency brand. We view this as the main driver of medium-term revenue and margin growth.
Valuation: Narrowed discount to peers
Dentsu’s share price is now down 2% year-to-date, while global marketing service group peers have declined on average by 6%. Dentsu’s shares trade below their long-term average of 1.4x EV/net revenue and at a narrowed discount to peers of 6% on average EV/EBITDA for FY22–24e. At the time of our August report, the discount was 33%, primarily reflecting the underperformance of the peer set.
Rebasing forecasts
We have realigned our FY23 forecasts to match Denstu Group’s guidance as we are so far through the group’s trading year and so there should be reasonable confidence in management’s visibility. With what should be one-off factors of severance costs and adjustments associated with the DACH cluster contracts flowing through in the current year, we would expect that the guided adjusted operating margin of 15.0% should prove to be a base, with recovery from FY24. Management has previously discussed ambitions to reach a margin of 18.0%, but our forecasts (for now) are more modest, looking for 15.4% in FY24 and with our FY25 numbers, published now for the first time, a further expansion to 16.4%. Given the emphasis on efficiency improvements, tight control of the cost base alone should make this achievable, before any benefits from scale.
We have built in top-line growth of 4.5% for FY24, which will include a full year’s revenues from Tag, the acquisition that completed this year on 1 July. Until we have better visibility, we have pencilled in 3.5% organic growth for FY25, which is below the previously disclosed CAGR ambition of 4–5%.
In reaching our estimates for FY24, we have assumed that underlying demand, particularly from the technology sector, improves more notably in the latter part of the year. This may also prove to be overly cautious.
With regard to the dividend, management is using a base earnings figure corrected for the impact of the DACH cluster and severance costs, which it calculates at ¥390 per share, rather than the ¥335 that it expects to report for the year. The payout ratio had been expected to build towards 35% in FY24, but the timescale has been accelerated so this level of distribution is made for FY23. The final dividend is therefore now expected to be ¥58.5, giving as total for the year of ¥137, down from last year’s payment of ¥155.
Exhibit 1: Summary of revisions to forecasts
EPS (¥) |
PBT (¥bn) |
EBITDA (¥bn) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2022 |
485 |
485 |
- |
186.5 |
186.5 |
- |
216.8 |
216.8 |
- |
2023e |
461 |
335 |
-27 |
175.4 |
121.9 |
-31 |
243.5 |
204.2 |
-16 |
2024e |
509 |
436 |
-14 |
190.2 |
162.9 |
-14 |
256.0 |
233.4 |
-9 |
2025e |
- |
650 |
N/A |
- |
179.0 |
N/A |
- |
252.0 |
N/A |
Source: Dentsu accounts, Edison Investment Research
Japan delivers best regional performance over Q3 and 9M23
Japan: Q3 organic net revenue growth 3.0%, 9M organic growth 1.9%, 41% of 9M group net revenue
The group’s targeted higher-growth area of Customer Transformation & Technology (CT&T) led the way, reporting ‘double-digit’ growth over the first nine months. The consulting offering in business transformation also benefited from good levels of demand and had a particularly good Q3. Advertising was flat year-on-year, with some weakness in both TV spot and digital advertising and stronger demand for Connected TV and retail media, which are more profitable for the group. Overall Q3 advertising trends were improving, but more slowly than had been hoped. Absolute levels of net revenue are likely be higher than the prior year.
Americas: Q3 organic net revenue decline -6.6%, 9M organic decline -6.3%, 29% of 9M group net revenue
As in previous quarters and as reported by others in the industry, sales cycles for CT&T-type projects have lengthened and more ambitious projects have been scaled back. On the Media front, lower levels of spend from clients in the technology and finance sectors is a narrative heard elsewhere in the sector. For Dentsu, this has been exacerbated by client losses experienced in H222 and H123. Management’s view is that sentiment here is on the turn and surveys of chief marketing officers in these segments are indicating higher levels of spend building through FY24. The creative practices seem to have turned the corner after an extended period of under-performance, with new business wins and expansion of accounts from existing clients.
It is in the Americas where the One dentsu initiative is being honed under new regional leadership. This is focused on putting together more holistic solutions to client business challenges, rather than each agency approaching separately with their own skill sets on offer, or ‘Integrated Growth Solutions’ in Dentsu’s vernacular. Pooled specialist resources can deliver more efficiently with better utilisation rates. This is taken further by the identification of accelerator clients, of which there are currently 11 with multinational footprints, each with account leads working closely with the client. 30 further regionally strategic clients have been identified, which will benefit from the One dentsu approach and may become accelerator clients over time.
So far, this has resulted in a 50% uplift in pitch conversion.
EMEA: Q3 organic net revenue decline -17.2%, 9M organic decline -9.7%; 20% of 9M group net revenue
There were a number of factors behind the poor performance in the EMEA region. Firstly, there was a pattern of reduced media spending in technology and finance, measured against strong prior year comparators. Secondly, as in the Americas, CT&T declined after client losses in H123 with slower pipeline conversion. Patterns across different countries across the region were mixed, with positive organic growth in Spain, Italy and the Netherlands and generally better local performance than that from global accounts.
The issue on a highly complex set of interwoven projects in business transformation and systems integration across the DACH region that was identified late in Q223 carried across into Q323 as more remedial work was done. Management is confident that all necessary adjustments to previously recorded revenue and profit have now been made and that no further adjustments should be necessary in Q423. This issue alone is estimated by management to account for 100bp of the reduction now guided to the FY23 operating margin.
New regional management has been appointed for EMEA, tasked with rolling out the integrated growth solutions approach, backed by the One dentsu initiative.
Asia-Pacific (excluding Japan): Q3 organic net revenue decline -9.1%, 9M organic decline -8.0%, 10% of 9M group net revenue.
The Asia-Pacific region experienced a more generalised malaise, reflecting challenging macroeconomic conditions in many of the individual territories. This played out in lower Media revenues across the region as clients pulled back spend, with Creative organic revenues declining on weakness in China, although South Korea and Hong Kong largely bucked the trend. CT&T reported an organic revenue decline due to slower new business conversion in Australia and New Zealand.
Valuation
The Q323 and 9M23 performances of the major global marketing service holding companies has been surprisingly divergent. At least some of the differential has been due to the degree of exposure to the spending of technology and financial clients. Publicis was particularly notable for its outperformance, while Interpublic and WPP have had more difficult trading periods, factors clearly reflected in their share price performances. Dentsu’s share price in the year-to-date has done better than its peers on average and, combined with the moves in consensus estimates, the discount on which Dentsu was trading to its peers has narrowed significantly, from 33% in August to 6% now, when taken as an average of EV/EBITDA across FY22–24. The sector overall is trading well below its long-term average multiples.
Exhibit 2: Valuation of major marketing service holding companies
|
Price |
Market cap |
YTD |
EV/sales (x) |
EV/EBITDA (x) |
P/E (x) |
Dividend yield |
|||||
Company |
(local CCY) |
(US$m) |
(%) |
CY23 |
CY22 |
CY23 |
CY24 |
CY22 |
CY23 |
CY24 |
(%) |
|
Omnicom |
US$76 |
14,986 |
-7 |
1.1 |
6.8 |
6.7 |
6.4 |
11.1 |
10.3 |
9.7 |
3.7 |
|
WPP |
700p |
9,201 |
-15 |
1.0 |
6.1 |
6.0 |
5.8 |
7.3 |
7.5 |
7.2 |
5.6 |
|
Interpublic |
US$29 |
11,004 |
-14 |
1.2 |
6.4 |
6.5 |
6.2 |
10.5 |
10.3 |
9.8 |
4.3 |
|
Publicis |
€70 |
18,695 |
22 |
1.5 |
6.7 |
6.6 |
6.3 |
11.2 |
10.2 |
9.8 |
4.5 |
|
Hakuhodo |
¥1,117 |
2,703 |
-16 |
0.8 |
3.8 |
4.5 |
4.5 |
11.9 |
15.8 |
14.6 |
2.9 |
|
Peer average |
|
|
-6 |
1.1 |
6.0 |
6.1 |
5.9 |
10.4 |
10.8 |
10.2 |
4.2 |
|
Dentsu |
¥4,412 |
8,780 |
6 |
1.0 |
5.6 |
6.0 |
5.2 |
9.4 |
13.7 |
10.5 |
3.0 |
|
Premium/(discount) |
|
|
12% |
-14% |
-6% |
-2% |
-11% |
-9% |
26% |
3% |
-28% |
|
Source: Refinitiv, Edison Investment Research. Note: Prices as at 14 November 2023.
Exhibit 3: Financial summary
¥m |
2021 |
2022 |
2023e |
2024e |
2025e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
1,085,592 |
1,243,883 |
1,260,700 |
1,316,000 |
1,362,060 |
Cost of Sales |
(109,015) |
(126,881) |
(138,400) |
(143,399) |
(148,418) |
||
Net revenue |
976,577 |
1,117,002 |
1,122,300 |
1,172,600 |
1,213,641 |
||
EBITDA |
|
|
196,917 |
216,831 |
204,177 |
233,361 |
251,990 |
Operating profit (before amort. and excepts.) |
|
|
179,028 |
203,189 |
151,500 |
180,684 |
199,313 |
Amortisation of acquired intangibles |
(29,409) |
(28,721) |
(40,793) |
(48,911) |
(48,911) |
||
Exceptionals |
93,579 |
(56,849) |
(28,200) |
(7,000) |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
0 |
||
Reported operating profit |
241,841 |
117,617 |
82,507 |
124,773 |
150,402 |
||
Net Interest |
(35,491) |
(20,246) |
(21,269) |
(15,804) |
(18,228) |
||
Joint ventures & associates (post tax) |
2,483 |
(1,932) |
(1,971) |
(2,010) |
(2,050) |
||
Exceptionals |
0 |
5,467 |
(6,410) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
146,020 |
186,478 |
121,851 |
162,870 |
179,035 |
Profit Before Tax (reported) |
|
|
208,833 |
100,908 |
52,857 |
106,959 |
130,124 |
Reported tax |
(93,979) |
(34,982) |
(19,557) |
(37,436) |
(45,544) |
||
Profit After Tax (norm) |
116,255 |
138,819 |
88,600 |
117,266 |
177,817 |
||
Profit After Tax (reported) |
114,853 |
65,925 |
33,300 |
69,523 |
84,581 |
||
Minority interests |
(6,463) |
(6,077) |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
109,203 |
130,037 |
88,512 |
113,279 |
173,434 |
||
Net income (reported) |
108,389 |
59,847 |
33,300 |
69,523 |
84,581 |
||
Average Number of Shares Outstanding (m) |
279 |
268 |
264 |
260 |
267 |
||
EPS - normalised (¥) |
|
|
392 |
485 |
335 |
436 |
650 |
EPS - normalised fully diluted (¥) |
|
|
390 |
482 |
333 |
433 |
646 |
EPS - basic reported (¥) |
|
|
389 |
223 |
126 |
267 |
317 |
Dividend (¥) |
118 |
155 |
137 |
152 |
162 |
||
Net revenue growth (%) |
16.9 |
14.4 |
0.5 |
4.5 |
3.5 |
||
EBITDA Margin to revenue less pass-through costs (%) |
20.2 |
19.4 |
18.2 |
19.9 |
20.8 |
||
Normalised op. margin to revenue less pass-through costs (%) |
18.3 |
18.2 |
13.5 |
15.4 |
16.4 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
1,377,417 |
1,423,928 |
1,630,155 |
1,633,440 |
1,619,725 |
Intangible Assets |
858,748 |
962,100 |
1,163,900 |
1,154,162 |
1,127,424 |
||
Tangible Assets |
173,681 |
168,859 |
173,286 |
186,309 |
267,088 |
||
Investments & other |
344,988 |
292,969 |
292,969 |
292,969 |
225,213 |
||
Current Assets |
|
|
2,343,115 |
2,317,496 |
2,148,326 |
2,335,258 |
2,517,131 |
Stocks |
20,661 |
3,670 |
4,550 |
4,715 |
4,880 |
||
Debtors |
1,500,020 |
1,578,922 |
1,692,447 |
1,766,685 |
1,828,519 |
||
Cash & cash equivalents |
723,541 |
603,740 |
320,167 |
432,697 |
552,571 |
||
Other |
98,893 |
131,164 |
131,162 |
131,162 |
131,162 |
||
Current Liabilities |
|
|
(1,971,873) |
(2,017,695) |
(2,036,191) |
(2,171,353) |
(2,219,908) |
Creditors |
(1,465,110) |
(1,532,591) |
(1,588,827) |
(1,694,575) |
(1,772,544) |
||
Tax and social security |
(60,960) |
(30,894) |
(30,894) |
(30,894) |
(30,894) |
||
Short term borrowings |
(93,067) |
(95,790) |
(95,790) |
(95,790) |
(95,790) |
||
Other |
(352,736) |
(358,420) |
(320,680) |
(350,094) |
(320,680) |
||
Long Term Liabilities |
|
|
(839,188) |
(768,403) |
(827,141) |
(848,027) |
(842,410) |
Long term borrowings |
(486,122) |
(436,639) |
(431,022) |
(425,405) |
(419,788) |
||
Other long term liabilities |
(353,066) |
(331,764) |
(396,119) |
(422,622) |
(422,622) |
||
Net Assets |
|
|
909,471 |
955,326 |
915,148 |
949,318 |
1,074,538 |
Minority interests |
(64,440) |
(75,060) |
(75,149) |
(75,149) |
75,149 |
||
Shareholders' equity |
|
|
845,031 |
880,266 |
840,000 |
874,169 |
1,149,687 |
CASH FLOW |
|||||||
Operating Cash Flow |
283,709 |
175,078 |
146,328 |
208,547 |
231,712 |
||
Working capital |
69,156 |
(3,519) |
(58,168) |
31,345 |
15,970 |
||
Exceptional & other |
(98,761) |
40,156 |
14,435 |
4,421 |
1,885 |
||
Tax |
(103,813) |
(115,764) |
(40,600) |
(37,436) |
(63,771) |
||
Net operating cash flow |
|
|
150,291 |
95,951 |
61,994 |
206,878 |
185,796 |
Capex |
318,135 |
(4,585) |
(23,500) |
(23,500) |
(23,500) |
||
Acquisitions/disposals |
(49,671) |
(40,873) |
(231,333) |
(11,487) |
5,513 |
||
Net interest |
(14,920) |
(18,301) |
(21,269) |
(15,804) |
(18,228) |
||
Equity financing |
(30,010) |
(40,006) |
0 |
0 |
0 |
||
Net dividends |
(19,128) |
(37,895) |
(42,600) |
(37,554) |
(41,891) |
||
Other |
(147,241) |
(24,920) |
0 |
0 |
0 |
||
Net Cash Flow |
207,456 |
(70,629) |
(256,708) |
118,532 |
107,690 |
||
Opening net debt/(cash) |
|
|
54,115 |
(144,352) |
(71,311) |
206,645 |
88,498 |
FX |
23,095 |
13,932 |
(20,800) |
0 |
0 |
||
Other non-cash movements |
(32,082) |
(16,344) |
(448) |
(385) |
(426) |
||
Closing net debt/(cash) |
|
|
(144,352) |
(71,311) |
206,645 |
88,498 |
(18,765) |
Source: company accounts, Edison Investment Research
|
|
Research: Industrials
The aerospace cycle is in strong recovery mode and Melrose Industries, assisted by the restructuring actions, is taking full advantage at both the top line and profit level. Internal momentum and market recovery provide confidence that management’s target returns set out for FY25 will be achieved, offering a further positive valuation catalyst.