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Currency in JPY
Last close As at 30/03/2023
JPY4,535.00
▲ 115.00 (2.60%)
Market capitalisation
JPY1,198,182m
Research: TMT
Dentsu’s Q1 update shows a third successive quarter of improvement (a reducing decline in organic revenue), with Dentsu Japan down 0.9% on Q120 and Dentsu International 3.5% below prior year. Operating margins were considerably stronger in both segments as the transformation plan has kicked in. Q221 has started very strongly, and we leave our FY21 and FY22 revenue and margin estimates unchanged, but note that if trading continues to improve, there may be scope to move numbers later in the year, subject to the status of the planned Olympics. FY22 should be a stronger year of margin growth as permanent cost reductions contribute.
Dentsu Group |
Progressive quarterly improvements |
Q1 update |
Media |
18 May 2021 |
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 Q1 update shows a third successive quarter of improvement (a reducing decline in organic revenue), with Dentsu Japan down 0.9% on Q120 and Dentsu International 3.5% below prior year. Operating margins were considerably stronger in both segments as the transformation plan has kicked in. Q221 has started very strongly, and we leave our FY21 and FY22 revenue and margin estimates unchanged, but note that if trading continues to improve, there may be scope to move numbers later in the year, subject to the status of the planned Olympics. FY22 should be a stronger year of margin growth as permanent cost reductions contribute.
Year end |
Net revenue (¥bn) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/19 |
939.4 |
101.3 |
271 |
95 |
12.8 |
2.7 |
12/20 |
835.0 |
123.5 |
250 |
71 |
13.9 |
2.0 |
12/21e |
850.0 |
124.7 |
271 |
77 |
12.8 |
2.2 |
12/22e |
900.0 |
149.7 |
337 |
100 |
10.3 |
2.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Better prospects for Q221
Performance improved across the quarter, with March returning to organic growth, with a 2.5% increase. Q221 looks likely to be notably stronger, with April organic revenue growth at Dentsu International (DI) up 17%, albeit against weaker comparatives. Margin performance in Q1 was particularly strong: up 350bp to 32.8% at Dentsu Japan Network (DJN) and up 360bp to 10.3% for DI (at constant currency). For H221, the comparatives will be tougher (with H220 spending having been reined in) and much of this gain is likely to be whittled away. For FY21, guidance is for group margin to be broadly flat. Our modelling indicates 14.7% for normalised group operating profit to revenue less cost of sales, against 14.8% in FY20. Meaningful progress is more likely in FY22 as the permanent cost savings kick in and we are looking for an uplift at group level to 16.7%. Group targets are for DI to reach 15% and for DJN to post 20%. Progress on the transformation plan looks to be on track, with the planned share buyback on hold while the group engages in the possible sale and leaseback of the Shiodome head office building.
Olympic uncertainty
The big unknown currently is over the planned Tokyo Olympics, which our forecast assumes proceeds as planned. Management is sensibly withholding formal guidance until the interim results in August, by which time the die will be cast.
Valuation: FY22 discount to peers widened
The share price has drifted since February’s finals, reflecting uncertainty over the Olympics and relatively thin news flow. Looking out to FY22, we expect the benefits of restructuring and the impact of the simplification programme to be more pronounced. With a stronger share price performance by the peer group, the valuation gap has grown, with Dentsu trading at a 21% discount on EV/EBITDA and 29% on P/E. Given the anticipated margin expansion, we view this differential as overstated.
Comprehensive review remains on track
There has been progress across all four pillars of the comprehensive review during Q121, described in detail in our February initiation.
Simplification
DJN (46% of Q121 revenue less cost of sales) is being organised into four domains: Advertising Transformation (AX); Business Transformation (BX); Customer Experience Transformation (CX); and Digital Transformation (DX). Two of its largest agencies, Dentsu Digital and Dentsu Isobar, are being merged as of 1 July, bringing a creative angle to the digital mix as well as building scale. Dentsu Direct is another new entity, with the direct marketing and search specialists being brought together.
In DI, the ambitious programme to consolidate 160 brands down to six is well underway, with 56 agencies already brought together, ahead of plan. This has the potential to be both highly disruptive internally and unsettling to clients but looks to be being handled well. Master service set schedules have been drawn up to clarify centres of expertise and limit duplication of services, and client input has been an embedded part of the process. The largest combination to date has been Vizeum and iProspect, and there has been no client attrition as a result. At the end of the process, DI anticipates being the most integrated of the major global agency groups.
Lower operating expenses
There is no change to management guidance for annualised group cost savings of ¥75bn from FY22 (of which ¥50bn will fall into FY21). The associated cost in FY21 is guided to ¥56bn (also unchanged), with a further spend in DJN of ¥3bn the following year.
For DJN, the uplift to operating margins in Q121 was primarily from lower operating costs, ¥3.7bn lower than prior year, with a small contribution from the permanent cost reductions from the early retirement programme. As the market reopens, those variable costs would be expected to rise, across Q2-Q421, hence management guidance to broadly flat operating margin FY21 vs. FY20 (at constant currency).
At DI, progress has been good, with over half of planned cost savings already achieved, including renegotiating more than 50 property leases. Better use is being made of near-shoring and off-shoring opportunities, and further incremental gains are being made through automation, where appropriate.
Balance sheet efficiency
The group has disposed of two properties in Japan in Q121 for ¥30bn, but news is still awaited on the possible sale and leaseback of the head office building in Shiodome, which could be transformative for the balance sheet (press reports suggest it could be worth around ¥300bn ($2.7bn). Net debt at the quarter end was ¥169bn, up from ¥54bn at the year end, with working capital absorption (as would be expected) in the quarter.
Shareholder value
The ¥30bn share buyback, announced in February, has not been commenced due to the Shiodome potential disposal. Management has repeatedly referred to the potential for further returns following exceptional asset disposals. However, the commitment to growing the Customer Transformation and Technology proportion of the business towards the 50% target (from 29% in Q121) will require further investment in people and technology. Management targets a progressive dividend policy, with a pay-out ratio of 35% of basic EPS.
Exhibit 1: Financial summary
¥'m |
2018 |
2019 |
2020 |
2021e |
2022e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
1,018,512 |
1,047,881 |
939,243 |
955,045 |
1,010,768 |
Cost of Sales |
(85,832) |
(108,496) |
(104,201) |
(109,526) |
(115,689) |
||
Revenue less pass through costs |
932,680 |
939,385 |
835,042 |
845,520 |
895,079 |
||
EBITDA |
|
|
171,404 |
160,279 |
90,061 |
61,486 |
154,945 |
Normalised operating profit |
|
|
153,229 |
140,751 |
123,979 |
125,000 |
150,000 |
Amortisation of acquired intangibles |
(35,123) |
(34,806) |
(31,877) |
(31,877) |
(31,877) |
||
Exceptionals |
(2,149) |
(99,733) |
(229,629) |
(54,500) |
(3,000) |
||
Share-based payments |
(4,313) |
(9,568) |
(3,094) |
0 |
0 |
||
Reported operating profit |
111,638 |
(3,358) |
(140,625) |
(24,480) |
68,979 |
||
Net Interest |
(17,714) |
(42,103) |
(1,419) |
(290) |
(290) |
||
Joint ventures & associates (post tax) |
2,699 |
517 |
910 |
0 |
0 |
||
Exceptionals |
52,128 |
2,175 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
190,342 |
101,340 |
123,470 |
124,710 |
149,710 |
Profit Before Tax (reported) |
|
|
148,751 |
(42,769) |
(141,134) |
(24,770) |
68,689 |
Reported tax |
(51,250) |
(30,136) |
(11,162) |
8,917 |
(24,041) |
||
Profit After Tax (norm) |
107,321 |
86,653 |
78,177 |
79,814 |
97,312 |
||
Profit After Tax (reported) |
97,501 |
(72,905) |
(152,296) |
(15,853) |
44,648 |
||
Minority interests |
(7,185) |
(7,987) |
(7,299) |
(2,500) |
(2,500) |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
97,420 |
76,122 |
69,891 |
76,314 |
94,812 |
||
Net income (reported) |
90,316 |
(80,892) |
(159,595) |
(18,353) |
42,148 |
||
Basic average number of shares outstanding (m) |
282 |
281 |
279 |
282 |
282 |
||
EPS - basic normalised (¥) |
|
|
346 |
271 |
250 |
271 |
337 |
EPS - diluted normalised (¥) |
|
|
346 |
271 |
249 |
269 |
335 |
EPS - basic reported (¥) |
|
|
320 |
(288) |
(571) |
(65) |
150 |
Dividend (¥) |
90 |
95 |
71 |
77 |
100 |
||
Net revenue growth (%) |
6.3 |
0.7 |
(11.1) |
1.3 |
5.9 |
||
EBITDA Margin to revenue less pass-through costs (%) |
18.4 |
17.1 |
10.8 |
7.3 |
17.3 |
||
Normalised operating margin to revenue less pass-through costs (%) |
16.4 |
15.0 |
14.8 |
14.8 |
16.8 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
1,702,899 |
1,862,033 |
1,455,591 |
1,370,575 |
1,324,083 |
Intangible Assets |
1,036,772 |
1,000,313 |
800,551 |
768,150 |
744,273 |
||
Tangible Assets |
199,207 |
315,116 |
280,196 |
227,581 |
204,966 |
||
Investments & other |
466,920 |
546,604 |
374,844 |
374,844 |
374,844 |
||
Current Assets |
|
|
1,935,586 |
1,933,691 |
1,924,813 |
1,796,474 |
1,782,097 |
Stocks |
28,580 |
21,007 |
23,848 |
25,067 |
26,477 |
||
Debtors |
1,368,728 |
1,424,127 |
1,293,370 |
1,242,867 |
1,291,924 |
||
Cash & cash equivalents |
416,668 |
414,055 |
530,692 |
451,639 |
386,794 |
||
Other |
121,610 |
74,502 |
76,903 |
76,901 |
76,901 |
||
Current Liabilities |
|
|
(1,785,608) |
(1,859,224) |
(1,759,071) |
(1,648,153) |
(1,596,568) |
Creditors |
(1,341,461) |
(1,390,778) |
(1,247,172) |
(1,221,466) |
(1,169,881) |
||
Tax and social security |
(42,981) |
(17,689) |
(71,228) |
(71,228) |
(71,228) |
||
Short term borrowings |
(104,879) |
(184,816) |
(72,533) |
(72,533) |
(72,533) |
||
Other |
(296,287) |
(265,941) |
(368,138) |
(282,926) |
(282,926) |
||
Long Term Liabilities |
|
|
(742,129) |
(883,971) |
(800,987) |
(800,987) |
(800,987) |
Long term borrowings |
(433,979) |
(439,110) |
(512,274) |
(512,274) |
(512,274) |
||
Other long term liabilities |
(308,150) |
(444,861) |
(288,713) |
(288,713) |
(288,713) |
||
Net Assets |
|
|
1,110,748 |
1,052,529 |
820,346 |
717,909 |
708,625 |
Minority interests |
63,129 |
77,556 |
63,483 |
65,983 |
68,483 |
||
Shareholders' equity |
|
|
1,173,877 |
1,130,085 |
883,829 |
783,892 |
777,108 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
208,490 |
47,198 |
(55,166) |
61,196 |
154,655 |
||
Working capital |
7,866 |
(28,254) |
(22,538) |
23,578 |
(102,053) |
||
Exceptional & other |
(35,011) |
148,452 |
213,845 |
290 |
3,290 |
||
Tax |
(48,296) |
(87,439) |
(47,828) |
8,627 |
(24,331) |
||
Net operating cash flow |
|
|
133,049 |
79,957 |
88,313 |
93,691 |
31,561 |
Capex |
(31,322) |
(31,000) |
(19,948) |
(21,474) |
(21,474) |
||
Acquisitions/disposals |
(50,555) |
(47,860) |
(26,585) |
(73,210) |
(18,000) |
||
Net interest |
0 |
0 |
0 |
0 |
0 |
||
Equity financing |
(12) |
(20,008) |
(10,004) |
(30,000) |
0 |
||
Dividends |
(32,055) |
(30,031) |
(29,574) |
(18,110) |
(24,932) |
||
Other |
10,768 |
(35,674) |
141,820 |
(29,950) |
(32,000) |
||
Net Cash Flow |
29,873 |
(84,616) |
144,022 |
(79,053) |
(64,845) |
||
Opening net debt/(cash) |
|
|
154,752 |
122,190 |
209,870 |
54,115 |
133,168 |
FX |
(18,281) |
1,490 |
(12,071) |
0 |
0 |
||
Other non-cash movements |
20,970 |
(4,554) |
23,804 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
122,190 |
209,870 |
54,115 |
133,168 |
198,013 |
Source: Company accounts, Edison Investment Research
|
|
Research: Consumer
Treatt has once again demonstrated the strength of its business model, with another excellent set of results, and yet another upgrade to guidance. The performance continues to be testament to the management and culture of the business, which has been transformed under CEO Daemmon Reeve’s nine years at the helm. Both sales and profit performance are impressive, and we once again raise our forecasts, as the ‘healthier’ categories continue to outperform. The relocation of the UK business is under way, and we expect the business to continue to perform well once the new UK capacity comes on stream.
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