Dentsu Group — Still fighting market headwinds

Dentsu Group (TYO: 4324)

Last close As at 03/12/2024

JPY3,950.00

60.00 (1.54%)

Market capitalisation

JPY1,049,909m

More on this equity

Research: TMT

Dentsu Group — Still fighting market headwinds

Dentsu posted Q324 organic net revenue growth of 0.3%, making a decline of 1.1% over the nine-month period. This is slightly below expectations at the half-year and, as the market for larger, transformational projects is still stagnant, management has trimmed full year organic revenue growth guidance to 0% (was 1%) and that for adjusted operating profit by 7%. There are positive elements to these figures, in particular continuing progress in Japan and good new business boosted by the ‘one dentsu’ initiative. The unveiling of the mid-term management plan has been delayed to February 2025, with the FY24 figures. Post the reaction to the Q3 figures, the shares now trade at a 10% discount to peers on EV/EBITDA.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Dentsu Group

Still fighting market headwinds

Q3 results

Media

18 November 2024

Price

¥4,097

Market cap

¥1,107bn

Net debt at 30 September 2024

¥323.7bn

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

(11.2)

(3.6)

1.7

Rel (local)

(10.9)

(7.5)

(11.0)

52-week high/low

¥4,861

¥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

FY24 results

February 2025

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

Dentsu Group is a research client of Edison Investment Research Limited

Dentsu posted Q324 organic net revenue growth of 0.3%, making a decline of 1.1% over the nine-month period. This is slightly below expectations at the half-year and, as the market for larger, transformational projects is still stagnant, management has trimmed full year organic revenue growth guidance to 0% (was 1%) and that for adjusted operating profit by 7%. There are positive elements to these figures, in particular continuing progress in Japan and good new business boosted by the ‘one dentsu’ initiative. The unveiling of the mid-term management plan has been delayed to February 2025, with the FY24 figures. Post the reaction to the Q3 figures, the shares now trade at a 10% discount to peers on EV/EBITDA.

Year end

Net revenue (¥bn)

PBT*
(¥bn)

EPS*
(¥)

DPS
(¥)

P/E
(x)

Yield
(%)

12/22

1,119.5

187.6

488

155

8.4

3.8

12/23

1,144.8

151.6

340

140

12.1

3.4

12/24e

1,195.7

151.4

350

140

11.8

3.4

12/25e

1,216.5

165.1

384

140

10.7

3.4

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

Margins set to rebuild from FY25

The revised guidance steers to an adjusted group operating margin of 14%, down from 15% previously. This partly reflects inherent operating leverage and disadvantageous terms of trade in international markets, but also factors in increased headcount in Japan in the digital area as the business in Dentsu’s home market continues to do well. Our modelling suggests a return to an adjusted group operating margin of just over 15% for FY25 (was 16%), subject to the levels of investment to be clarified in the new mid-term plan. Some of the principles of this plan have now been outlined, with a continuing focus on internal investment in AI, data and technology, talent and operations.

Japan doing well, US more difficult

Japan’s performance was in line across Business transformation, creative and media. The disappointment was primarily within Customer Experience Management (CXM), where international clients remain reluctant to approve larger projects when they themselves face uncertain end markets. Recovery is happening, just at a slow pace. Other new business reported is encouraging, particularly wins of eBay for Media and of Adobe in Creative, harnessing wider group capabilities.

Valuation: Discount to peers post Q3 reaction

Dentsu’s shares are down c 15% on the Q3 figures, having previously outperformed the global marketing service peers over the year to date. Despite this decline, the shares are up 13% from the start of the year, ahead of the average of +9% for the peers. This masks a wide range from +23% (Publicis) to -12% (Interpublic). Dentsu’s shares now trade roughly at a 10% discount to peers on EV/EBITDA and a 14% discount on P/E across FY23–25e.

Q3 results: Good in Japan, mixed elsewhere

We have reset our FY24 estimates to match the revised management guidance, which effectively downgrades the underlying operating profit by 7%. The revised revenue guidance is actually higher, at ¥1,400m from ¥1,357m, but this is the impact of forex changes rather than a fundamental shift. This gain has mostly dissipated by the net revenue line, which is a more representative indicator of the activity of the business. Here the revision is up 0.5%.

Exhibit 1: Summary revisions to estimates

Underlying operating profit (¥m)

Underlying operating margin (%)

Underlying basic EPS (¥)

Old

New

% chg

Old

New

% chg

Old

New

% chg

2024e

180.0

167.7

-7

15.1

14.0

-110bp

382.0

350.1

-8

2025e

196.0

183.6

-6

16.0

15.1

-110bp

411.3

383.9

-7

Source: Edison Investment Research

The reduction at the underlying EPS level is slightly greater at -8%, but the estimated full year dividend remains unchanged at ¥139.5.

Our FY25 revisions reflect the lower prior year base.

Regional conditions still divergent

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

Exhibit 2 Quarterly financial progression by geography

¥bn

Q323

Q423

Q124

Q224

Q324

Net revenue

Japan

106.9

121.9

123.0

101.8

109.9

Americas

82.7

88.8

80.5

86.6

81.3

EMEA

57.9

73.9

57.2

68.1

64.9

APAC ex-Japan

29.4

35.5

24.2

29.4

26.5

Eliminations

2.0

2.2

1.5

1.5

2.0

Group

278.9

322.3

286.4

287.4

284.5

U/l operating profit

Japan

24.1

30.8

33.9

15.2

22.8

Americas

20.5

24

13.1

20.7

17.2

EMEA

2.3

16.2

(0.7)

9.7

7.5

APAC ex-Japan

2.1

7.6

(3.1)

0.6

(1.8)

Eliminations

(11.6)

(13.3)

(13.3)

(13.0)

(11.5)

Group

37.4

65.3

29.9

33.1

34.2

Underlying operating margin

Japan

22.5%

25.3%

27.6%

14.9%

20.8%

Americas

24.8%

27.0%

16.3%

23.9%

21.2%

EMEA

4.0%

21.9%

-1.2%

14.2%

11.6%

APAC ex-Japan

7.1%

21.4%

-12.8%

2.0%

-6.8%

Group

13.4%

20.3%

10.4%

11.5%

12.0%

Source: Dentsu

For Japan, the net revenue for the first nine months of 2024 (9M24) is the highest achieved to date for that period, with particularly strong demand in the internet advertising sphere, up 17% in the quarter and 15% in 9M24. Television remains the largest business category, and here net sales were up 6% in the quarter. Business transformation, termed BX, was up double digits, with continuing strong demand. Pitch win rates have been notably strong, and management is confident that the region will meet internal expectations for the full year.

Alongside Japan, the Americas remains a priority for the group’s development, reflecting its importance in the global market. Here net revenue was 3% softer than Q323 on a like-for-like basis, down 4.5% in 9M24 and showing a sequential improvement. The key issue is that of a difficult backdrop for the CXM practice, with clients reluctant to commit to substantive projects. Although there is some recovery here, it is slow, and management expects a continued organic decline in Q424. We are encouraged by the wins of eBay (Media) and Adobe (Creative). The former win is testament to the strength of the group’s international offering and its willingness to harness innovation, including the benefits of the data, tech and AI-driven solutions within Dentsu’s Merkury product suites. The Adobe win stems from a deep understanding of the client and its tech stack, as well as the ability to tap into resources across the ‘one dentsu’ group, including those that came into the group with last year’s Tag acquisition.

In Europe, the Middle East and Africa (EMEA), the organic growth rate turned positive, although this is a mechanistic effect from the prior year issue with the Dach cluster (see our August 2023 outlook note), and stripping this out, there would have been an organic decline of 3.4%. This is an improvement on the first half organic decline of 7.5%. Difficult CXM markets persist here as well, although again there is some modest improvement and this is the root cause of the reduced regional projection. Creative reportedly returned to growth in Q3, with momentum into Q4 and a good phase of new business wins in Media should also benefit both Q4 and FY25.

Asia-Pacific (APAC) (ex Japan) remains challenged, with continuing problems in China (far from unique to Dentsu) and weak CXM demand from Australia. Organic growth in the region was down 11.6% in the quarter and down 8.4% over 9M24. Media services has stayed a soft market, but with better demand from larger players, and Creative has simply stayed difficult.

Early indications on the mid-term plan

While the mid-term plan will not be revealed in any detail until the full year results in February, there have been some hints about the key themes. These include:

Concentrating resources on the key markets of Japan and the US. This is not to be taken as an indication of retrenching geographically, but more that investment around developing data and technology-driven offerings will be concentrated here.

Strengthening the structure for strategic clients, which we take to mean an extension and deepening of the resource dedicated to the Accelerator clients, discussed in earlier reports.

Further investment in data, technology, AI and talent that will drive enhanced collaboration and integration, including collaboration on Japanese clients.

Driving greater efficiency within the organisation through adjusting the cost structure in the middle and back office and eliminating internal functional duplication.

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 performing very strongly, both operationally and in terms of share price performance, with Omnicom, WPP and Stagwell all delivering share price increases in double figures over the year to date.

When we last carried out this exercise in August, Dentsu’s valuation was sitting at an average 26% discount on EV/EBITDA across the years CY23–25, having narrowed from 31% in May. The shares had been performing strongly prior to this Q3 update. However, post the market reaction to the results, the discount is now approximately 10%.

Exhibit 3: Peer valuations

 

Share price

Market cap

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

€103

27,885

23

2.0

10.1

9.4

8.9

16.3

14.2

13.4

3.8

Omnicom

US$101

20,490

16

1.7

10.2

9.7

9.1

12.5

13.2

12.2

3.2

WPP

838p

11,469

11

1.0

6.7

7.2

7.3

74.6

9.6

9.4

5.2

Interpublic

US$29

10,880

-12

1.3

7.1

7.2

7.4

11.5

10.3

10.6

3.8

Hakuhodo

¥1,140

2,859

6

0.5

7.3

6.9

6.7

20.4

23.5

20.3

2.3

Stagwell

US$7

1,960

11

1.5

10.4

9.1

8.5

-

9.8

9.7

0.0

Peer average

 

9

1.3

8.6

8.2

8.0

27.1

13.4

12.6

3.1

Dentsu

¥4,097

7,126

13

1.2

8.0

7.5

6.9

12.1

11.8

10.7

3.4

Premium/(discount)

 

-10%

-7%

-9%

-13%

-55%

-12%

-15%

11%

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

Exhibit 4: Financial summary

¥'m

2022

2023

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,246,401

1,304,552

1,400,100

1,440,000

Cost of Sales

(126,882)

(159,733)

(204,400)

(223,476)

Net revenue

1,119,519

1,144,819

1,195,700

1,216,524

EBITDA

 

 

217,519

178,127

190,189

206,086

Operating profit (before amort. and excepts.)

 

 

204,319

163,515

167,700

183,600

Amortisation of acquired intangibles

(28,721)

(30,691)

(36,689)

(36,689)

Exceptionals

(56,849)

(87,840)

(10,132)

(2)

Share-based payments

0

(500)

0

0

Reported operating profit

118,747

45,312

92,000

146,913

Net Interest

(20,246)

(15,810)

(19,806)

(21,983)

Joint ventures & associates (post tax)

(1,932)

3,400

3,468

3,521

Exceptionals

5,467

526

0

0

Profit Before Tax (norm)

 

 

187,608

151,631

151,362

165,139

Profit Before Tax (reported)

 

 

102,038

33,103

75,662

128,451

Reported tax

(34,982)

(38,572)

(52,162)

(46,242)

Profit After Tax (norm)

139,949

95,309

96,845

105,689

Profit After Tax (reported)

67,055

(5,469)

23,500

82,209

Minority interests

(6,077)

(5,245)

(5,245)

(5,245)

Discontinued operations

0

0

0

0

Net income (normalised)

130,854

89,899

91,600

100,444

Net income (reported)

60,977

(10,714)

18,255

76,964

Average Number of Shares Outstanding (m)

268

264

262

262

EPS - normalised (¥)

 

 

488

340

350

384

EPS - normalised fully diluted (¥)

 

 

485

338

348

382

EPS - basic reported (¥)

 

 

228

(41)

90

314

Dividend (¥)

155

140

140

140

Net revenue growth (%)

16.9

2.3

4.4

1.7

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

19.4

15.6

15.9

16.9

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

18.3

14.3

14.0

15.1

BALANCE SHEET

Fixed Assets

 

 

1,281,646

1,355,588

1,333,150

1,299,912

Intangible Assets

962,100

1,069,854

1,047,416

1,014,178

Tangible Assets

26,577

29,430

29,430

29,430

Investments & other

292,969

256,304

256,304

256,304

Current Assets

 

 

2,270,531

2,087,362

2,299,108

2,381,606

Stocks

3,670

6,396

8,185

8,948

Debtors

1,531,957

1,524,289

1,822,048

1,893,699

Cash & cash equivalents

603,740

390,678

302,878

312,962

Other

131,164

165,999

165,997

165,997

Current Liabilities

 

 

(2,017,695)

(1,939,910)

(2,101,336)

(2,081,661)

Creditors

(1,532,591)

(1,527,612)

(1,726,151)

(1,735,890)

Tax and social security

(30,894)

(28,088)

(28,088)

(28,088)

Short term borrowings

(95,790)

(39,213)

(39,213)

(39,213)

Other

(358,420)

(344,997)

(307,884)

(278,470)

Long Term Liabilities

 

 

(768,403)

(781,735)

(574,258)

(568,641)

Long term borrowings

(245,961)

(455,232)

(449,615)

(443,998)

Other long term liabilities

(522,442)

(326,503)

(124,643)

(124,643)

Net Assets

 

 

766,079

721,305

956,664

1,031,215

Minority interests

(75,060)

(71,104)

(76,349)

(81,594)

Shareholders' equity

 

 

691,019

650,201

880,315

949,621

CASH FLOW

Operating Cash Flow

176,208

111,822

171,528

224,318

Working capital

(3,519)

(60,338)

(101,009)

(62,675)

Exceptional & other

40,156

85,937

37,099

69

Tax

(115,764)

(47,301)

(52,162)

(46,242)

Net operating cash flow

 

 

97,081

90,120

55,456

115,469

Capex

(4,585)

(27,623)

(28,892)

(28,892)

Acquisitions/disposals

(40,873)

(136,544)

(11,487)

(10,762)

Net interest

(18,301)

(20,583)

(19,806)

(21,983)

Equity financing

(40,006)

(4)

(20,000)

0

Net dividends

(37,895)

(42,009)

(39,975)

(37,733)

Other

(24,920)

(27,786)

(16,500)

(349)

Net Cash Flow

(69,499)

(164,429)

(81,204)

15,750

Opening net debt/(cash)

 

 

(144,352)

(262,008)

106,136

187,742

FX

13,932

11,117

0

0

Other non-cash movements

173,223

(214,832)

(402)

(49)

Closing net debt/(cash)

 

 

(262,008)

106,136

187,742

172,041

Source: Dentsu accounts, Edison Investment Research

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General disclaimer and copyright

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.

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.

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London, WC1R 4PS

United Kingdom

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Research: Financials

JDC Group — On track to reach high-end FY24 sales guidance

After two quarters of >20% y-o-y revenue growth, JDC Group (JDC) has benefited from strong tailwinds in Q324 as well. Revenue growth of 36% in the quarter was partly driven by the acquisition of Top Ten, but mostly by strong Insurance, investment and banks activities. Q424 is also expected to be strong and JDC indicated that the high end of FY24 revenue guidance of €205–220m is well within reach. FY24 EBITDA guidance is in the range of €14.5–16.0m (FY23: €11.7m). After raising our estimates with the H124 results, we make no further changes. Our discounted cash flow provides a valuation of €34.0/share.

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