Dentsu Group — Positive momentum

Dentsu Group (TYO: 4324)

Last close As at 10/10/2024

JPY4,651.00

53.00 (1.15%)

Market capitalisation

JPY1,222,148m

More on this equity

Research: TMT

Dentsu Group — Positive momentum

Dentsu’s H124 figures show sequential quarterly improvements, with the group posting organic growth of 0.2% in Q2. Encouragingly, this is in part ascribed to improved pitch win rates in all four reporting regions, underpinning growth projections through H224 and into FY25, despite the persistent difficult macroeconomic backdrop. The One dentsu initiative is driving collaborative efforts across group capabilities and geographies and we expect this to be at the heart of the new medium-term strategy, to be unveiled in H2. In the meantime, the Business transformation (BX) offering is proving effective in Japan and is now to be rolled out more widely. The shares continue to be valued well below peers and we would expect this discount to narrow with improving operational performance.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Dentsu Group

Positive momentum

H124 results

Media

16 August 2024

Price

¥4,207

Market cap

¥1,137bn

Net debt (¥bn) at 31 June 2024

259.1

Shares in issue

270.2m

Free float

75.8%

Code

DENN

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.9

(0.9)

1.2

Rel (local)

15.7

4.1

(10.9)

52-week high/low

¥4,553

¥3,557

Business description

Dentsu Group operates in around 120 countries. It works with leading organisations to deliver experience transformation, through media, customer experience and creative services, and business transformation services.

Next events

Q324 results

Mid-November 2024

FY24 results

February 2025

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Milo Bussell

+44 (0)20 3077 5700

Dentsu Group is a research client of Edison Investment Research Limited

Dentsu’s H124 figures show sequential quarterly improvements, with the group posting organic growth of 0.2% in Q2. Encouragingly, this is in part ascribed to improved pitch win rates in all four reporting regions, underpinning growth projections through H224 and into FY25, despite the persistent difficult macroeconomic backdrop. The One dentsu initiative is driving collaborative efforts across group capabilities and geographies and we expect this to be at the heart of the new medium-term strategy, to be unveiled in H2. In the meantime, the Business transformation (BX) offering is proving effective in Japan and is now to be rolled out more widely. The shares continue to be valued well below peers and we would expect this discount to narrow with improving operational performance.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/22

1,119.5

187.6

488

155

8.7

3.7

12/23

1,129.5

151.3

340

140

12.5

3.3

12/24e

1,189.3

159.8

382

140

11.1

3.3

12/25e

1,227.0

178.7

411

141

10.3

3.3

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

Japan leads the way back into growth

Dentsu achieved organic growth of 0.2% in Q224, its first positive quarterly gain since Q422, when comparatives were affected by the pandemic. The Japanese business (40% of H124 net revenue) has again proved the most robust, with organic growth of 1.8% in the quarter (+2.1% for H124), reflecting a healthy online media market. The Americas (the second most important region at 29%) posted a lesser rate of decline at -3.7% organic, after -6.6% in Q1. Improving win rates provide momentum into H2, along with the cycling out of prior year losses. The EMEA region is now lapping last year’s issues in the DACH region, with organic growth of 7.8%, supported by a notably strong performance in media. The smallest region, APAC Ex-Japan (9% of group), is improving slowly but still posting quarterly declines. Dentsu’s underlying Q2 operating margin was 11.5% and the target for the full year remains c 15%.

Good period for net new business

Dentsu has had a better period for net new business gains, particularly in media, where pitch conversion rates have been improving. The pipeline remains attractive and is gauged at 85% offensive opportunities (ie winning new clients rather than retaining existing clients where the business has been opened for pitching). Larger transformation project opportunities remain sluggish, but good levels of precursor strategy work bode well for future periods when corporate confidence strengthens.

Valuation: Waiting for growth

Dentsu’s share price is up 14% year-to-date. Global marketing service group peers’ performances have diverged, ranging from +10% (Publicis) to -9% (WPP). Dentsu’s shares trade well below their long-term average of 1.4x EV/net revenue and at a 26% discount to peers on average FY23–25e EV/EBITDA.

On track to meet full year guidance

Management’s (unchanged) FY24 guidance is for net revenue of ¥1,189.3bn, which implies H224 net revenue of ¥615.5bn, which would be 2.4% ahead of the prior year (on an actual basis, rather than organic). We regard this as achievable, particularly considering easing comparatives in the second half. At the underlying operating profit level, meeting full year guidance of ¥180.0bn implies achieving ¥128.1bn in the second half, which would represent an underlying operating margin of 20.8%. Margins are inherently seasonally higher in the second half and our view is that this level should be possible, provided that there are no further external shocks, geopolitical or otherwise.

Still variability by region

The table below shows the quarterly progression by region and it is particularly worth noting the underlying operating margin movements.

Exhibit 1: Quarterly financial progression by geography

¥bn

Q123

Q223

Q323

Q423

Q124

Q224

Net revenue

Japan

119.6

100.5

106.9

121.9

123.0

101.8

Americas

73.2

77.3

82.7

88.8

80.5

86.6

EMEA

52.1

53.6

57.9

73.9

57.2

68.1

APAC ex-Japan

22.1

26.2

29.4

35.5

24.2

29.4

Eliminations

2.4

1.1

2.0

2.2

1.5

1.5

Group

269.4

258.7

278.9

322.3

286.4

287.4

Underlying operating profit

Japan

33.7

14.8

24.1

30.8

33.9

15.2

Americas

13.3

15.2

20.5

24.0

13.1

20.7

EMEA

3.7

2.0

2.3

16.2

(0.7)

9.7

APAC ex-Japan

(2.2)

0.4

2.1

7.6

(3.1)

0.6

Eliminations

(10.7)

(9.5)

(11.6)

(13.3)

(13.3)

(13.0)

Group

37.8

22.9

37.4

65.3

29.9

33.1

Underlying operating margin

Japan

28.2%

14.7%

22.5%

25.3%

27.6%

17.6%

Americas

18.2%

19.7%

24.8%

27.0%

16.3%

23.9%

EMEA

7.1%

3.7%

4.0%

21.9%

-1.2%

14.2%

APAC ex-Japan

-10.0%

1.5%

7.1%

21.4%

-12.8%

2.0%

Group

14.0%

8.9%

13.4%

20.3%

10.4%

11.5%

Source: Dentsu

In Japan, the two largest components of net revenue, internet advertising and television, both had a good quarter, ahead by 14.7% and 2.5%, respectively, outperforming the underlying market. By industry, the largest segment (household and personal products) was a notably strong performer, with net revenue up 28.5%. In terms of the type of business being carried out, business transformation grew in double-digits, with digital transformation in high single-digits. The customer experience was against tougher comparatives, but good net new business wins (with better pitch conversion rates) here hold out for improved prospects through H2 and into FY25.

The Americas posted a better result for Q2 than for Q1 and with momentum building in new client wins, further progress in the second half is now effectively underwritten, with earlier client losses now cycling through. Both media and creative elements are seeing improving pipeline conversion, with media having a particularly strong further pipeline into H2. Customer Transformation and Technology (CT&T) remains affected by long sales cycles and the unhelpful macroeconomic backdrop. The upsides are that strategy work, often the precursor of larger projects, remains robust and clients that implemented major projects post-pandemic are now starting to appraise subsequent phases, albeit that implementation could still be a couple of years out. The investment made in data and technology expertise, analysis and implementation, encapsulated in the launch of Merkury, is already proving its worth in conversations with existing and potential clients.

In EMEA, the first half figures were flattered by the comparatives that were for the period of the one-off DACH cluster issue (see our August 2023 outlook note). Stripping out this effect, organic net revenue would have been down 7.5% rather than the posted -0.9%. Media had a particularly good quarter, with a better-than-expected win rate of local clients. Creative benefited from new client wins in the Netherlands and increased scope from existing clients. The same issues of long sales cycles were seen in CT&T, but management notes a strengthening pipeline.

In Asia-Pacific (ex-Japan), organic net revenue improved slightly over the prior quarter at -6.2% from -7.1% in Q124, with prior year client losses continuing to drag on performance. Media performed well in Thailand and Indonesia, benefiting from strong relationships with local clients and large client spending in creative gave a steady result in this practice. As elsewhere, CT&T remains challenging, particularly in Australia due to client losses.

The presentation also included a sizzle reel from Dentsu Lab (Exhibit 2), which demonstrates some of the group’s capability in creative R&D. This is currently on offer to clients in five countries and is being expanded globally. This is not likely to be a significant profit centre as a free-standing entity, but forms a potentially valuable part of the broader integrated growth services client offering and is also highly regarded by management as an engine for delivering social good, both for Dentsu and for its clients.

Exhibit 2: Dentsu Lab showcase

Source: Dentsu

Valuation

We look at the valuation of Dentsu in comparison to a core set of global peers, including Stagwell, which, although smaller, has considerable ambitions to build its global presence. Publicis has clearly been outperforming the pack, both operationally and in terms of share price performance, and we also note the continuing strong share price performance of Japan-based Hakuhodo. Dentsu’s share price is up by 14% year-to-date, with the financial newsflow not providing any major surprises in the period but with improved momentum.

When we last carried out this exercise in May, Dentsu’s valuation was sitting at an average 31% discount in EV/EBITDA across the years CY23–25. With the positive response to the results, this has narrowed to 26%, and we would expect it to continue to decrease as the prospects for improving group performance by implementation of the new mid-term plan come into better focus.

Exhibit 3: Peer valuations

 

Price

Market cap

Ytd

EV/revenue (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

Company

(local ccy)

(US$m)

(%)

CY24e

CY23

CY24e

CY25e

CY23

CY24e

CY25e

(%)

Publicis

€92

25,707

10

1.8

9.0

8.5

8.1

16.3

12.6

11.9

3.8

Omnicom

US$94

18,450

9

1.6

9.4

9.0

8.5

12.5

11.9

11.0

3.2

Interpublic

US$31

11,470

-6

1.4

7.4

7.4

7.3

11.5

10.7

10.4

3.8

WPP

693p

9,570

-9

0.9

6.0

6.3

6.3

74.6

7.8

7.6

5.2

Hakuhodo

¥1,165

3,081

8

0.5

7.1

6.9

6.6

20.4

23.1

19.6

2.3

Stagwell

US$6

1,700

-3

1.2

9.6

8.3

7.9

-

8.5

7.6

0.0

Peer average

 

2

1.2

8.1

7.7

7.4

27.1

12.4

11.3

3.1

Dentsu

¥3,854

7,916

15

1.0

6.5

5.6

5.3

12.6

11.2

10.4

33

Premium/(discount)

 

5%

-22%

-19%

-27%

-29%

-53%

-10%

-8%

7%

Source: LSEG Data & Analytics, Edison Investment Research. Note: Prices as at 15 August 2024.

Exhibit 4: Financial summary

¥'m

2022

2023

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,243,883

1,289,301

1,356,700

1,393,000

Cost of Sales

(124,383)

(159,786)

(167,400)

(166,000)

Net revenue

1,119,500

1,129,515

1,189,300

1,227,000

EBITDA

 

 

217,500

175,742

203,377

218,527

Operating profit (before amort. and excepts.)

 

 

204,300

163,290

180,000

196,040

Amortisation of acquired intangibles

(28,721)

(30,600)

(36,689)

(36,689)

Exceptionals

(56,849)

(87,840)

(6,111)

0

Share-based payments

0

(500)

0

0

Reported operating profit

118,728

45,300

107,122

159,350

Net Interest

(20,246)

(15,901)

(23,664)

(20,820)

Joint ventures & associates (post tax)

(1,932)

3,400

3,468

3,521

Exceptionals

5,467

526

0

0

Profit Before Tax (norm)

 

 

187,589

151,315

159,804

178,741

Profit Before Tax (reported)

 

 

102,019

33,100

86,925

142,052

Reported tax

(34,982)

(38,500)

(50,225)

(49,718)

Profit After Tax (norm)

139,930

95,165

101,000

112,969

Profit After Tax (reported)

67,036

(5,400)

36,700

92,334

Minority interests

(6,077)

(5,200)

(5,200)

(5,200)

Discontinued operations

0

0

0

0

Net income (normalised)

130,835

89,800

101,034

107,769

Net income (reported)

60,958

(10,700)

31,500

87,134

Average Number of Shares Outstanding (m)

268

264

265

262

EPS - normalised (¥)

 

 

488

340

382

411

EPS - normalised fully diluted (¥)

 

 

485

337

380

409

EPS - basic reported (¥)

 

 

227

(20)

139

352

Dividend (¥)

155

140

140

141

Net revenue growth (%)

16.9

0.9

5.3

3.2

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

19.4

15.6

17.1

17.8

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

18.2

14.5

15.1

16.0

BALANCE SHEET

Fixed Assets

 

 

1,423,928

1,465,069

1,459,754

1,443,639

Intangible Assets

962,100

1,069,800

1,047,362

1,014,124

Tangible Assets

168,859

173,286

190,409

207,532

Investments & other

292,969

221,983

221,983

221,983

Current Assets

 

 

2,317,496

2,243,566

2,369,236

2,499,113

Stocks

3,670

5,253

5,504

5,458

Debtors

1,578,922

1,684,039

1,765,568

1,812,808

Cash & cash equivalents

603,740

423,112

467,002

549,685

Other

131,164

131,162

131,162

131,162

Current Liabilities

 

 

(2,017,695)

(2,026,316)

(2,149,422)

(2,164,761)

Creditors

(1,532,591)

(1,578,952)

(1,672,644)

(1,717,397)

Tax and social security

(30,894)

(30,894)

(30,894)

(30,894)

Short term borrowings

(95,790)

(95,790)

(95,790)

(95,790)

Other

(358,420)

(320,680)

(350,094)

(320,680)

Long Term Liabilities

 

 

(768,403)

(671,658)

(865,087)

(859,470)

Long term borrowings

(436,639)

(431,022)

(425,405)

(419,788)

Other long term liabilities

(331,764)

(240,636)

(439,682)

(439,682)

Net Assets

 

 

955,326

1,010,661

814,481

918,520

Minority interests

(75,060)

(71,100)

(76,300)

(81,500)

Shareholders' equity

 

 

880,266

939,561

738,181

837,020

CASH FLOW

Operating Cash Flow

176,189

109,477

182,792

237,918

Working capital

(3,519)

(60,339)

11,912

(2,440)

Exceptional & other

40,156

83,563

39,803

(1,095)

Tax

(115,764)

(47,600)

(50,225)

(49,718)

Net operating cash flow

 

 

97,062

85,100

184,282

184,665

Capex

(4,585)

(27,600)

(27,600)

(27,600)

Acquisitions/disposals

(40,873)

(148,900)

(11,487)

(10,762)

Net interest

(18,301)

(15,901)

(23,664)

(20,820)

Equity financing

(40,006)

0

(20,000)

0

Net dividends

(37,895)

(42,000)

(35,121)

(36,785)

Other

(24,920)

(11,574)

11,993

(349)

Net Cash Flow

(69,518)

(160,874)

78,402

88,349

Opening net debt/(cash)

 

 

(144,352)

(71,311)

103,700

25,700

FX

13,932

(11,000)

0

0

Other non-cash movements

(17,455)

(3,137)

(402)

(403)

Closing net debt/(cash)

 

 

(71,311)

103,700

25,700

(62,246)

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.

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.

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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.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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Research: Healthcare

Basilea Pharmaceutica — Poised for an eventful H224

Basilea’s H124 results reflect strong momentum across its pipeline and we expect the pace to accelerate in H224. The key highlight of the period was the FDA approval of Zevtera. We now expect all eyes to be on the announcement of a US commercial partner and the Phase III launch for fosmanogepix (expected imminently). Lead product Cresemba continued its outperformance versus our estimates (16.6% growth in royalties), contributing >90% of H124 revenues of CHF76.3m and driving the company’s FY24 guidance upgrade (group revenues of CHF196m versus CHF183m previously) with H2-weighed milestone payments. The balance sheet continues to strengthen, with strong operating cash flows (CHF17.9m in H124) and a healthy cash balance (gross cash of CHF63m). We adjust our estimates for the stronger than anticipated performance of Cresemba, with our valuation rising to CHF89.7 per share from CHF84.0 per share previously.

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