Dentsu Group — Solid Q3 and new One dentsu group structure

Dentsu Group (TYO: 4324)

Currency in JPY

Last close As at 02/02/2023

JPY4,045.00

−85.00 (−2.06%)

Market capitalisation

JPY1,115,782m

Research: TMT

Dentsu Group — Solid Q3 and new One dentsu group structure

Dentsu’s Q322 results show an organic net revenue decline of 3.7% (-4.7% including Russia), reflecting a particularly tough comparative with Q321 in Japan. This masks continuing good progress in building revenues from Customer Transformation & Technology (CT&T), which grew over 20% and now constitutes 32.6% of group revenues. Alongside the figures, Dentsu announced a further restructuring from 1 January 2023 that removes the distinction between Dentsu Japan Network (DJN) and Dentsu International (DI). The reconfigured global management team will reflect the group’s increasing diversity and includes the first non-Japanese CFO.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Dentsu Group

Solid Q3 and new One dentsu group structure

Q3 results

Media

16 November 2022

Price

¥4,415

Market cap

¥1,167bn

¥139.00/US$

Net debt (¥bn) at end September 2022

148.3

Shares in issue

264.42m

Free float

77.8%

Code

DENN

Primary exchange

TSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.0

(3.1)

9.8

Rel (local)

1.9

(2.3)

14.5

52-week high/low

¥5,020.0

¥3,550.0

Business description

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

Next events

Preliminary FY23 results

February 2023

Analysts

Fiona Orford-Williams

+44 (0) 20 3077 5739

Milo Bussell

+44 (0) 3077 5700

Dentsu Group is a research client of Edison Investment Research Limited

Dentsu’s Q322 results show an organic net revenue decline of 3.7% (-4.7% including Russia), reflecting a particularly tough comparative with Q321 in Japan. This masks continuing good progress in building revenues from Customer Transformation & Technology (CT&T), which grew over 20% and now constitutes 32.6% of group revenues. Alongside the figures, Dentsu announced a further restructuring from 1 January 2023 that removes the distinction between Dentsu Japan Network (DJN) and Dentsu International (DI). The reconfigured global management team will reflect the group’s increasing diversity and includes the first non-Japanese CFO.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(
¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/20

835.0

123.5

250

71

17.7

1.6

12/21

976.6

146.0

392

118

11.3

2.7

12/22e

1,098.3

172.6

440

140

10.0

3.2

12/23e

1,115.0

183.7

460

153

9.6

3.5

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

FY22 guidance unchanged; possible modest upside

Full year guidance remains for 4–5% organic revenue growth, with further benefit from currency and from prior acquisitions to build to the overall forecast progress of 12.5%. Management, as with peers, is not (yet) noticing any marked reticence on behalf of advertisers and appetite for CT&T remains particularly positive, with progress here notably strong in EMEA, which was ahead by over 20% in the first nine months of FY22 (9M22). If currencies stay at the current level, management suggests that there would be a further 10% boost to FY22 EPS at the full year. The operating margin for 9M22 was 16.4%, which is consistent with full-year guidance of 18.0% (17.7% including Russia). We expect the transition to ‘One dentsu’ will be a temporary drag on FY23e operating margin and have modelled 17.3%, recovering to 18.0% in FY24e.

CT&T to remain the driver in One dentsu

The ambition to build CT&T to half of group revenues in the medium term remains intact, with continued investment to optimise and scale the offering. Within Dentsu International, the proportion is 36%, with the Americas higher still. DJN is making good progress, with CT&T now making up 27.9% of segmental revenue (up 4.6%). The combination of consultancy with media and execution is seen as a key differentiator to the global consultants offering related services.

Valuation: Differential to peers overstated

Dentsu’s shares are up 12% year-to-date, making them the best performing share of the major global marketing service holding companies, although this out-performance has tempered over the last quarter as other share prices recovered. The valuation discount has therefore increased since our last report in August, with the shares currently trading at a discount to peers of 34% on EV/EBITDA and 12% on P/E across FY22–24e. Given the improving quality of business with more emphasis on digital transformation, we still believe this differential is overstated.

New segmentation from 1 January 2023

For now, the reporting remains split into DJN and DI, which accounted for 40% and 60%, respectively, of group revenues over the nine months to end September. As outlined in the presentation, the intention is to operate and report with four regions, overseen, co-ordinated and supported through group functions at the centre. The key benefits outlined include:

greater efficiency and faster decision-making,

broader and deeper relationships with global clients,

easier exchange of best practice, and

the ability to offer all group capabilities across all geographies.

Under the new structure, the head office team will be headed up by the current president and CEO, Hiroshi Igarashi, with Nick Priday, currently CFO for DI, taking up the CFO role at group level – the first non-Japanese national to do so.

Exhibit 1: Intended group structure

Source: Dentsu Group

9M22 financials broadly as expected

DJN posted an organic revenue decline of 0.1%, which is, of itself, a considerable achievement given the scale of the uplift in Q321 from the Tokyo Olympics, when net revenues were up 49.7%. CT&T comprised 27.9% of the total 9M22 net revenues, up from 23.3% in the prior period and a further small advance from H122, when it accounted for 27.5%.

Underlying operating margin was softer, at 24.2% (9M21: 26.9%), again reflecting the unusual trading in the comparative period.

At DI, the performance in the Americas was perhaps a little disappointing, with quarterly growth of 0.7%, but this may have been affected by timing issues. (Other marketing service holding companies have reported strong Q3 trading in North America.)

In contrast, the performance in Europe, the Middle East and Africa (EMEA) was particularly good, with net revenues up 9.2% in the quarter. This figure is supressed by the results of the Russian business, and stripping this out, net revenue growth was an impressive 15.7%. For 9M22, organic growth was 10.1% (5.6% including Russia). DI has now agreed terms with local management for the latter to buy the Russian business and the transaction now awaits regulatory approval. The estimated total loss on the transaction is approximately ¥37.0bn (assuming the sale is completed within FY22), assuming ¥16.4bn of statutory operating income in the 9M22 numbers. CT&T had a particularly strong performance in the nine-month period, up over 20%, while both Media and Creative practices posted growth in mid-single digits.

Asia-Pacific (APAC) ex-Japan had a more difficult Q3, with net revenue down 1.1%, leaving 9M22 still ahead at +2.7%. Given the repeated lockdowns, this can be broadly attributed to China, as management reports that Indonesia and Taiwan had high single-digit growth and India posted a notably strong performance, with organic net revenue growth over 10% as it builds scale and offers its clients a broader range of services.

The operating margin in DI was a little softer at 12.4% (13.1% ex Russia), with these figures implying some recovery in Q322 (operating margin at the half year stage was 11.9% (12.5% ex Russia)).

Overall, we have aligned our FY22 forecast to management guidance, which in effect means changes of less than one percent. For FY23 estimates, we have taken a slightly more cautious approach, given the current degree of uncertainty around possibly economic recession around the globe and have also assumed that the restructuring changes will have a modest impact on the achievable operating margin, which we have now set at 17.3% for the year, with recovery to 18.0% built into our modelling for FY24e.

Exhibit 2: Summary adjustments to forecasts

Net revenue (¥bn)

Underlying operating profit (¥bn)

EPS (¥)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2022e

1,100

1,098

0

194.7

194.4

0

442

440

0

2023e

1,136

1,115

-2

201.9

193.1

-4

473

460

-3

2024e

1,157

1,130

-2

207.8

203.7

-2

490

472

-4

Source: Dentsu Group accounts, Edison Investment Research

Management has reiterated its three-year targets of a CAGR of 4–5% organic growth, an 18.0% margin and a 35% pay-out ratio.

Valuation

There has been greater divergence between the performances of the key peer set over the year. At the time of the half year results in August, Dentsu had outperformed more strongly and the discount to the peer group had narrowed. Over recent weeks, there has been a more marked recovery in the share price performance of the peers, partly due to the US advertising market holding up better than had been previously anticipated. The discount has therefore widened again, to around 34% when measured on EV/EBITDA across FY22–24e and averaging 12% on a P/E basis.

Exhibit 3: Valuation of major marketing service holding companies

 

Market cap

YTD share pr perf

EV/sales (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

Company

(US$m)

(%)

CY22

CY22

CY23

CY24

CY22

CY23

CY24

(%)

Publicis

16,155

12

1.5

6.9

6.8

6.6

10.2

10.0

9.6

4.5

Omnicom

15,810

6

1.3

8.0

8.4

8.0

11.5

11.9

11.1

3.7

Interpublic

12,620

-13

1.5

9.2

9.6

9.1

11.9

12.4

11.3

3.5

WPP

11,030

-23

1.2

7.2

7.1

6.7

9.1

8.6

7.9

4.4

Hakuhodo

3,668

-29

0.4

6.2

6.1

5.5

17.2

16.4

14.3

2.3

Peer average

-9

1.2

7.5

7.6

7.2

12.0

11.9

10.8

3.7

Dentsu

8,624

12

0.9

4.9

4.9

4.7

10.5

10.1

9.8

3.0

Premium/(discount)

 

22%

-25%

-34%

-35%

-34%

-12%

-15%

-9%

-18%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 14 November 2022.

Exhibit 4: Financial summary

¥m

2020

2021

2022e

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

939,242

1,085,592

1,240,000

1,264,862

1,300,000

Cost of Sales

(104,200)

(109,015)

(141,700)

(149,912)

(170,293)

Net revenue

835,042

976,577

1,098,300

1,114,950

1,129,707

EBITDA

 

 

91,013

226,326

221,152

219,840

230,443

Operating profit (before amort. and excepts.)

 

 

123,979

179,028

194,400

193,088

203,691

Amortisation of acquired intangibles

(31,877)

(29,409)

(31,379)

(23,754)

(28,481)

Exceptionals

(229,631)

93,579

0

0

0

Share-based payments

(3,094)

0

0

0

0

Reported operating profit

(140,625)

241,841

163,021

169,334

175,209

Net Interest

(1,419)

(35,491)

(32,139)

(30,924)

(30,573)

Joint ventures & associates (post tax)

910

2,483

10,200

10,404

10,612

Exceptionals

1

0

0

0

0

Profit Before Tax (norm)

 

 

123,471

146,020

172,461

172,569

183,730

Profit Before Tax (reported)

 

 

(141,133)

208,834

141,082

148,815

155,249

Reported tax

(11,162)

(93,979)

(23,082)

(41,668)

(43,470)

Profit After Tax (norm)

78,178

116,257

127,276

124,249

132,286

Profit After Tax (reported)`

(152,295)

114,855

118,000

107,146

111,779

Minority interests

(7,299)

(6,463)

(23,500)

(6,834)

(7,276)

Discontinued operations

0

0

0

0

0

Net income (normalised)

69,892

109,206

118,000

117,416

125,010

Net income (reported)

(159,594)

108,392

94,500

100,313

104,503

Average Number of Shares Outstanding (m)

279

279

268

255

265

EPS - normalised (¥)

 

 

250

392

440

460

472

EPS - normalised fully diluted (¥)

 

 

249

389

437

457

469

EPS - basic reported (¥)

 

 

(571)

389

352

393

394

Dividend (¥)

71

118

140

153

164

Net revenue growth (%)

(10.4)

16.9

12.5

1.5

1.3

EBITDA Margin to net revenue (%)

10.9

23.2

20.1

19.7

20.4

Normalised operating margin to net revenue (%)

14.8

18.3

17.7

17.3

18.0

BALANCE SHEET

Fixed Assets

 

 

1,475,963

1,377,417

1,497,629

1,496,877

1,491,887

Intangible Assets

820,923

858,748

999,417

998,142

992,629

Tangible Assets

280,196

173,681

164,136

164,659

165,182

Investments & other

374,844

344,988

334,076

334,076

334,076

Current Assets

 

 

1,924,815

2,343,114

2,414,585

2,522,336

2,659,217

Stocks

23,848

20,661

26,856

38,951

44,246

Debtors

1,293,370

1,500,020

1,584,013

1,615,772

1,660,658

Cash & cash equivalents

530,691

723,540

704,827

768,723

855,422

Other

76,906

98,893

98,890

98,890

98,890

Current Liabilities

 

 

(1,759,071)

(1,971,873)

(2,149,876)

(2,182,230)

(2,227,958)

Creditors

(1,247,172)

(1,465,110)

(1,613,699)

(1,646,053)

(1,691,781)

Tax and social security

(71,228)

(60,960)

(60,960)

(60,960)

(60,960)

Short term borrowings

(72,533)

(93,067)

(93,067)

(93,067)

(93,067)

Other

(368,138)

(352,736)

(382,150)

(382,150)

(382,150)

Long Term Liabilities

 

 

(800,987)

(839,188)

(755,542)

(749,925)

(744,308)

Long term borrowings

(512,274)

(486,122)

(480,505)

(474,888)

(469,271)

Other long term liabilities

(288,713)

(353,066)

(275,037)

(275,037)

(275,037)

Net Assets

 

 

840,720

909,470

1,006,797

1,087,058

1,178,838

Minority interests

(63,483)

(64,440)

(87,940)

(94,774)

(102,049)

Shareholders' equity

 

 

777,237

845,030

918,857

992,284

1,076,789

CASH FLOW

Operating Cash Flow

(55,165)

283,710

199,213

199,321

210,482

Working capital

(22,538)

69,156

58,401

(11,500)

(4,454)

Exceptional & other

213,844

(98,760)

2,730

1,515

1,568

Tax

(47,829)

(114,388)

(55,221)

(72,592)

(74,042)

Net operating cash flow

 

 

88,312

139,718

205,124

116,744

133,553

Capex

(19,948)

318,135

(932)

(11,000)

(11,000)

Acquisitions/disposals

(26,585)

(49,671)

(121,725)

1,275

5,513

Net interest

0

0

0

0

0

Equity financing

(10,004)

(30,010)

(40,000)

0

0

Dividends

(29,574)

(23,472)

(33,375)

(37,505)

(35,322)

Other

141,820

(147,241)

(10,043)

0

0

Net Cash Flow

144,021

207,459

(951)

69,513

92,744

Opening net debt/(cash)

 

 

209,870

54,116

(144,353)

(131,257)

(200,770)

FX

(12,071)

23,095

(12,145)

0

0

Other non-cash movements

23,804

(32,085)

0

0

(429)

Closing net debt/(cash)

 

 

54,116

(144,353)

(131,257)

(200,770)

(293,086)

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.

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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.

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Industrials

Accsys Technologies — Accsys now owns 100% of Tricoya but Hull on hold

Accsys has provided an update on the construction of the Tricoya plant in Hull, UK. After the restructuring of the consortium, Accsys now owns 100% of Tricoya, which we think is positive. However, project costs are anticipated to be up to €35m higher than previously expected and all activities at the site have been put on hold for at least six months to mitigate the negative impact on profitability of high acetyls input prices. Accsys will assess the exact costs before it commits capital to completing the plant, which we estimate may require a capital raise of c €20m. We have reduced our estimates and increased our capex assumptions for Hull, resulting in a discounted cash flow (DCF) valuation of €0.95 per share.

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