Dentsu Group — Return to organic growth forecast for FY24

Dentsu Group (TYO: 4324)

Last close As at 24/04/2024

JPY4,267.00

38.00 (0.90%)

Market capitalisation

JPY1,152,794m

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Research: TMT

Dentsu Group — Return to organic growth forecast for FY24

Dentsu’s FY23 net revenue was a touch above guidance at Q3, with a better-than-expected operating margin reflecting a good Q4 in Japan, further boosted by a short delay in an IT project pushed out to Q124. The results were accompanied by the news of a change in global CFO, with the role reverting to Yushin Soga, who held the role until January 2023. As anticipated, net revenue outside Japan declined, although there was some trading improvement in the US in Q4. A thorough business review is now in progress, with the next mid-term plan due early in H2. In the meantime, the balance sheet is strong, with leverage reduced to 0.6x EBITDA, and share buybacks will be resumed. We regard the rating as undemanding.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Dentsu

Return to organic growth forecast for FY24

FY23 results

Media

20 February 2024

Price

¥4,305

Market cap

¥1,138bn

Net debt (¥bn) at 31 December 2023

103.7

Shares in issue

264.38m

Free float

75.8%

Code

DENN

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.22

8.71

(0.35)

Rel (local)

4.80

(1.53)

(24.80)

52-week high/low

¥4,960

¥3,586

Business description

Dentsu Group is a holding company, operating in over 145 countries. It provides a wide range of client-centric integrated communications, media and digital services.

Next events

Annual shareholders’ meeting

March 2024

Q124 figures

May 2024

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Milo Bussell

+44 (0)20 3077 5700

Dentsu is a research client of Edison Investment Research Limited

Dentsu’s FY23 net revenue was a touch above guidance at Q3, with a better-than-expected operating margin reflecting a good Q4 in Japan, further boosted by a short delay in an IT project pushed out to Q124. The results were accompanied by the news of a change in global CFO, with the role reverting to Yushin Soga, who held the role until January 2023. As anticipated, net revenue outside Japan declined, although there was some trading improvement in the US in Q4. A thorough business review is now in progress, with the next mid-term plan due early in H2. In the meantime, the balance sheet is strong, with leverage reduced to 0.6x EBITDA, and share buybacks will be resumed. We regard the rating as undemanding.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/21

976.6

146.0

392

118

10.3

2.9

12/22

1,119.5

187.6

488

155

8.3

3.8

12/23

1,129.5

151.3

340

140

11.9

3.4

12/24e

1,189.3

159.8

382

140

10.6

3.4

12/25e

1,227.0

178.7

406

141

10.0

3.4

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

Headwinds look to be easing

A number of the headwinds that troubled the group in FY23 should ease in FY24, with management guiding to organic revenue growth of 1%, and progress weighted to H2. In North America, H1 results will continue to be affected by earlier client losses but, encouragingly, there are signs of a resurgence in tech client spend and an improving new business win rate, with average project size picking up. Asia-Pacific is the most problematic region, and ¥53.1bn of intangibles has been written off. Across the group, the dismantling of silos under the One dentsu project is bringing together the skill sets in consulting, technology, media and creative. Adjusted operating margin for FY24 is guided to 15.1% (FY23: 14.5%, 16.1% excluding the impact of the DACH cluster issue and severance), reflecting continuing internal investment in data and technology as well as in people and skills. We have adjusted our estimates to bring them closer to guidance.

Focus on shareholder returns

The stronger balance sheet, with FY23 net debt/EBITDA of 0.59x (below 1.0–1.5x guidance), has enabled a higher dividend payout ratio and the reinstatement of the share buyback programme for FY24. Dentsu is setting up a new advisory finance committee to help boost shareholder returns through improved profitability and conversion to cash – core objectives for the next medium-term management plan.

Valuation: Not demanding

Dentsu’s share price is up 11% year-to-date, while global marketing service group peers have gained an average of 7%, albeit with divergent performances. Dentsu’s shares trade well below their long-term average of 1.4x EV/net revenue and at a 27% discount to peers on average FY23–25e EV/EBITDA.

Concerted efforts to shift the dial

Dentsu’s mid-term targets for FY21–24 for organic revenue growth of 4–5% CAGR, an operating margin of 17.0–18.0% in FY23 and 18.0% in FY24 will obviously not now be met, although this has been apparent for some time. This is due to a combination of internal and external factors, and the new mid-term growth plan currently being worked on should address the core issues, which we view as the need to strengthen the core business offering, simplify the organisation and invest in data and technology. The focus of the plan is on improving the returns to shareholders, through driving growth and cash conversion.

The One dentsu initiative is central to driving improved revenue and margin performance and has resonance with realignments taking place across the peer set. The need for systems and data to be readily available to structure and inform projects should mean greater coherence in the offering, giving more holistic solutions to client business challenges, rather than each agency approaching separately with their own skill sets on offer (‘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.

The scale of the global operations can make it difficult to adjust quickly, with the poor economic backdrop accentuating the weak points. Addressing the problems in the Asia-Pacific region is clearly a short-term priority and the impairment loss of ¥53.1bn (of which goodwill represents 95%) acknowledges this.

Exhibit 1: Summary of revisions to forecasts

Net revenue (¥bn)

Adjusted operating profit (¥bn)

EPS (¥)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2023

1,122.3

1,129.5

+1

151.5

163.5

+8

335

340

+1

2024e

1,172.6

1,189.3

+1

180.7

180.0

u/c

436

382

-13

2025e

1,213.6

1,227.0

+1

199.3

196.0

-2

650

406

-38

Source: Dentsu accounts, Edison Investment Research. Note: 2023 ‘Old’ = prior estimates.

Our revised forecasts for the current year are set to match the current company guidance, which we regard as sensible. Given the commentary around the FY23 figures and outlook, the likelihood is that the results will be weighted to H2.

We have made modest consequent adjustments to our FY25 figures and acknowledge the obvious gremlin that had slipped through on the EPS figure. 6% year-on-year progress looks more reasonable, helped by the continuation of the share buyback programme.

Exhibit 2: Long-term regional net revenue and operating margin performance

Source: Denstu accounts, Edison Investment Research

We may be overly cautious on the timing of the likely improvement in adjusted operating margin, given that the earlier ambition was for 18.0%, but the outlook here should be clearer once details of the next mid-term plan are disseminated.

Japan delivers best regional performance

Japan (40% FY23 net revenue): Q4 organic net revenue growth 0.9%, FY23 organic growth 1.6%.

The group’s Japanese business is demonstrating the benefits of the concentration on Customer Transformation & Technology (CT&T), now 30.8% of regional revenues, up from 28.2% in FY22. The ability to bring creative expertise into the consultancy offering is opening additional opportunities and driving growth, despite the relative weakness of the TV advertising market. The stronger-than-expected operating margin performance (FY23: 23.0%) partly reflects this business mix and partly the delay from November until February 2024 of an IT upgrade project.

The FY24 outlook for the Japanese business is described as ‘robust’.

Americas (28.7% FY23 net revenue): Q4 organic net revenue decline -9.3%, FY23 organic decline -7.2%.

FY23 performance was affected by the well-documented reduction in spend by major tech and finance clients on both marketing and transformation projects, so affecting revenues in both Media and CT&T. Creative actually posted a small positive organic growth rate of 1% for the year. Dentsu also suffered some client losses, the impact of which will extend into H124. The roll-out of One dentsu is clearly having a positive impact, with higher win conversion rates and better client retention.

Management reports some resumption of spend by tech clients in Q423, which has extended into Q124, giving hope for better full-year prospects. Lead times remain slow but the pipeline is good, and, encouragingly, is 90% offensive, whereas this time last year the figure was 60%.

EMEA (21.2% FY23 net revenue): Q4 organic net revenue decline -13.6%, FY23 organic decline 10.9%.

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 and reduced project scope from several clients. Patterns by country across the region were mixed, with positive organic growth in Spain and Italy, 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. No further adjustments were needed in Q423. This issue alone is estimated by management to have cost a 100bp reduction in the group FY23 operating margin.

New regional management is now in place, tasked with rolling out the integrated growth solutions approach, backed by the One dentsu initiative.

Asia-Pacific (excluding Japan) (10.1% FY23 net revenue): Q4 organic net revenue decline 8.6%, FY23 organic decline -8.2%.

The Asia-Pacific region experienced 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. India also suffered from Media client losses in Q223 and reduced project spend, particularly in CT&T.

The plan for driving growth and recovery in the region focuses on:

rebuilding the core businesses in China, Australia and New Zealand, and India, with roll-out of best practice from across the region and the wider group;

strengthening delivery of integrated growth solutions to accelerator clients, plus focus on Japanese clients operating in the wider Asia-Pacific region; and

reviewing the regional cost structure.

Valuation

We look at the valuation of Dentsu in comparison to the core set of global peers. Here Publicis has clearly been outperforming the pack both operationally and in terms of share price performance, and we also note the strong share price performance of Japan-based Hakuhodo. Dentsu’s share price is up by 11% year-to-date, with these results not providing any major surprises.

When we last carried out this exercise in November, Dentsu’s valuation was sitting at an average 33% discount in EV/EBITDA across the years CY22–24. We have now rolled this forward by a year and the average discount now sits at 27%. We would expect this discount to narrow as the benefits of the internal investment start to come through and the prospects for improving group performance by implementation of the new mid-term plan come into better focus.

Exhibit 3: Peer comparison

 

Price

Market cap

Share price perf YTD

EV/revenue (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

Company

(local CCY)

(US$m)

(%)

CY24

CY23

CY24

CY25

CY23

CY24

CY25

(%)

Publicis

€97

25,417

16

1.8

8.6

8.2

7.9

13.3

12.7

11.9

3.6

Omnicom

US$85

17,090

-3

1.2

7.4

7.1

6.7

11.0

10.2

9.4

3.5

Interpublic

US$32

12,140

-3

1.4

7.8

7.5

7.2

11.1

10.4

9.7

4.1

WPP

767p

10,231

2

1.1

6.8

6.8

6.5

8.2

8.1

7.6

5.1

Hakuhodo

¥1,343

3,474

24

0.4

8.5

7.4

6.8

33.0

20.4

18.5

2.4

Peer average

 

7

1.2

7.8

7.4

7.0

15.3

12.4

11.4

3.7

Dentsu

¥4,109

7,213

11

0.9

6.1

5.2

4.9

11.9

10.6

10.0

3.5

Premium/(disc.)

 

4%

-26%

-22%

-29%

-31%

-22%

-14%

-13%

-7%

Source: Refinitiv. Note: Prices at 14 February 2024.

Exhibit 4: Financial summary

¥'m

2021

2022

2023

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,085,592

1,243,883

1,289,301

1,356,700

1,393,000

Cost of Sales

(109,015)

(124,383)

(159,786)

(167,400)

(166,000)

Net revenue

976,577

1,119,500

1,129,515

1,189,300

1,227,000

EBITDA

 

 

196,917

217,500

175,742

203,377

218,527

Operating profit (before amort. and excepts.)

 

 

179,028

204,300

163,515

180,000

196,040

Amortisation of acquired intangibles

(29,409)

(28,721)

(30,600)

(36,689)

(36,689)

Exceptionals

93,579

(56,849)

(88,065)

(6,111)

0

Share-based payments

0

0

(500)

0

0

Reported operating profit

241,841

118,728

45,300

135,422

159,350

Net Interest

(35,491)

(20,246)

(15,901)

(23,664)

(20,820)

Joint ventures & associates (post tax)

2,483

(1,932)

3,400

3,468

3,521

Exceptionals

0

5,467

301

0

0

Profit Before Tax (norm)

 

 

146,020

187,589

151,315

159,804

178,741

Profit Before Tax (reported)

 

 

208,833

102,019

33,100

115,225

142,052

Reported tax

(93,979)

(34,982)

(38,500)

(48,325)

(49,718)

Profit After Tax (norm)

116,255

139,930

95,165

101,000

112,969

Profit After Tax (reported)

114,853

67,036

(5,400)

66,900

92,334

Minority interests

(6,463)

(6,077)

(5,200)

(5,200)

(5,200)

Discontinued operations

0

0

0

0

0

Net income (normalised)

109,203

130,835

89,800

101,034

107,769

Net income (reported)

108,389

60,958

(10,700)

61,700

87,134

Average Number of Shares Outstanding (m)

279

268

264

265

266

EPS - normalised (¥)

 

 

392

488

340

382

406

EPS - normalised fully diluted (¥)

 

 

390

485

337

380

403

EPS - basic reported (¥)

 

 

389

227

(20)

273

347

Dividend (¥)

118

155

140

140

141

Net revenue growth (%)

16.9

14.6

0.9

5.3

3.2

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

20.2

19.4

15.6

17.1

17.8

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

18.3

18.2

14.5

15.1

16.0

BALANCE SHEET

Fixed Assets

 

 

1,377,417

1,423,928

1,465,069

1,465,954

1,449,839

Intangible Assets

858,748

962,100

1,069,800

1,053,562

1,020,324

Tangible Assets

173,681

168,859

173,286

190,409

207,532

Investments & other

344,988

292,969

221,983

221,983

221,983

Current Assets

 

 

2,343,115

2,317,496

2,243,566

2,402,595

2,531,965

Stocks

20,661

3,670

5,253

5,504

5,458

Debtors

1,500,020

1,578,922

1,684,039

1,765,568

1,812,808

Cash & cash equivalents

723,541

603,740

423,112

500,361

582,537

Other

98,893

131,164

131,162

131,162

131,162

Current Liabilities

 

 

(1,971,873)

(2,017,695)

(2,026,316)

(2,149,422)

(2,164,761)

Creditors

(1,465,110)

(1,532,591)

(1,578,952)

(1,672,644)

(1,717,397)

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)

(671,658)

(865,087)

(859,470)

Long term borrowings

(486,122)

(436,639)

(431,022)

(425,405)

(419,788)

Other long term liabilities

(353,066)

(331,764)

(240,636)

(439,682)

(439,682)

Net Assets

 

 

909,471

955,326

1,010,661

854,040

957,573

Minority interests

(64,440)

(75,060)

(71,100)

(76,300)

(81,500)

Shareholders' equity

 

 

845,031

880,266

939,561

777,740

876,073

CASH FLOW

Operating Cash Flow

283,709

176,189

109,477

211,092

237,918

Working capital

69,156

(3,519)

(60,339)

11,912

(2,440)

Exceptional & other

(98,761)

40,156

83,563

6,803

(1,095)

Tax

(103,813)

(115,764)

(47,600)

(48,325)

(49,718)

Net operating cash flow

 

 

150,291

97,062

85,100

181,482

184,665

Capex

318,135

(4,585)

(27,600)

(27,600)

(27,600)

Acquisitions/disposals

(49,671)

(40,873)

(148,900)

(11,487)

(10,762)

Net interest

(14,920)

(18,301)

(15,901)

(23,664)

(20,820)

Equity financing

(30,010)

(40,006)

0

0

0

Net dividends

(19,128)

(37,895)

(42,000)

(35,462)

(37,285)

Other

(147,241)

(24,920)

(11,574)

0

0

Net Cash Flow

207,456

(69,518)

(160,874)

83,268

88,199

Opening net debt/(cash)

 

 

54,115

(144,352)

(71,311)

103,700

20,834

FX

23,095

13,932

(11,000)

0

0

Other non-cash movements

(32,082)

(17,455)

(3,137)

(402)

(405)

Closing net debt/(cash)

 

 

(144,352)

(71,311)

103,700

20,834

(66,959)

Source: Company reports, Edison Investment Research

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This report has been commissioned by Dentsu and prepared and issued by Edison, in consideration of a fee payable by Dentsu. 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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Ultimovacs — Another ODD boosts the off-the-shelf, universal UV1

Ultimovacs has been granted Orphan Drug designation (ODD) from the European Medicines Agency (EMA) for UV1 in mesothelioma, marking another step forward for the clinical development of its lead universal, off-the-shelf cancer vaccine. This encouraging regulatory designation follows on the heels of the FDA ODD (October 2023) and Fast Track designation (February 2024) for UV1 in this same indication, which helps set the foundation for a potential Phase III programme. A key benefit of EU ODD is the potential for 10-year market exclusivity, provided UV1 achieves regulatory approval. The EMA decision was based on the recent positive data from the Phase II NIPU trial (reported October 2023) demonstrating a 27% reduction in risk of death with UV1 treatment compared to the standard of care in patients with malignant pleural mesothelioma (MPM). We await the results from the Phase II INITIUM trial in malignant melanoma (MM), the company’s lead indication, in March 2024, which is likely the next catalyst for the company.

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