Currency in JPY
Last close As at 17/03/2023
JPY4,580.00
▲ 5.00 (0.11%)
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JPY1,236,005m
Research: TMT
Dentsu posted a very strong performance for Q321, with revenue less cost of sales (RLCoS) up 27.8% on an organic basis and a substantial uplift in operating margin to 23.5%, from 12.2% in Q221. Full-year guidance is raised, having been lifted in August, with an indication of a FY21 margin of 18.0% after greater intended investment in Q4. Proposed board changes for the new year split the chairman and CEO roles, with the existing CEO retiring and appointments of independent non-executives planned. The better performance and balance sheet strength support an uplift in DPS, with ¥113.5 now expected for the full year (previously ¥101).
Dentsu Group |
Strong Q3 lifts full-year guidance further |
Q321 results |
Media |
16 November 2021 |
Share price performance
Business description
Next events
Analysts
Dentsu Group is a research client of Edison Investment Research Limited |
Dentsu posted a very strong performance for Q321, with revenue less cost of sales (RLCoS) up 27.8% on an organic basis and a substantial uplift in operating margin to 23.5%, from 12.2% in Q221. Full-year guidance is raised, having been lifted in August, with an indication of a FY21 margin of 18.0% after greater intended investment in Q4. Proposed board changes for the new year split the chairman and CEO roles, with the existing CEO retiring and appointments of independent non-executives planned. The better performance and balance sheet strength support an uplift in DPS, with ¥113.5 now expected for the full year (previously ¥101).
Year end |
Net revenue (¥bn) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/19 |
939.4 |
101.3 |
271 |
95 |
15.3 |
2.3 |
12/20 |
835.0 |
123.5 |
250 |
71 |
16.7 |
1.7 |
12/21e |
966.9 |
135.2 |
378 |
114 |
11.0 |
2.8 |
12/22e |
1000.0 |
140.5 |
385 |
121 |
10.8 |
2.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Japan and digital lead the way in Q3
Q321 organic growth at Dentsu Japan Network (DJN) was exceptionally strong, up 49.7%. While the Olympics/Paralympics were only mentioned in passing in the release, it seems reasonable to assume they were a significant factor in driving the quarterly performance across traditional and digital media. Over 9M21, Customer Transformation and Technology, the heart of the transformation plan, reached 23.2% of DJN RLCoS. At Dentsu International (DI), the proportion is higher at 32.9%. The medium-term target is for the proportion to reach 50% at a group level. Organic growth at DI in Q321 was 13.4%, with an operating margin of 16.2%. We have adjusted our FY21 forecasts to reflect the updated guidance. For FY22, we have edged our revenue ahead but marginally increased our assumptions on costs.
Transforming the balance sheet
The sale of the Shiodome Head Office building on the last day of the quarter (price undisclosed but reportedly around ¥300bn) boosted operating profit by ¥87.0bn and net profit by ¥49.0bn, with a slightly higher tax cost than expected. The group’s cash position is also helped by the costs of transformation being lower than had been anticipated, with net cash of ¥13.1bn at end September. This supports the investment being made in transforming the business and the continuing M&A programme and the share buyback and higher dividend distribution.
Valuation: Overstated discount
The share price has recovered well from a dip during Q2, when newsflow was relatively thin, and is now 31% off those lows and up 40% year-to-date as the outlook has clarified. Across FY21 and FY22, the shares still sit at a substantial valuation discount to the peer set of 30% on EV/EBITDA and 21% on P/E. Given the anticipated margin expansion, we still believe this differential is overstated.
Board reorganisation
Alongside the financial results for Q321, a number of changes were announced that will put the group board into a more conventional structure for a global operation. Firstly, the roles of chairman and CEO are to be separated, with Tim Andree (currently executive chairman of DI) to be appointed as Dentsu Group’s first non-Japanese (non-executive) chairman from March 2022. There is to be a generational change at CEO level, where Hiroshi Igarashi, currently president and CEO of DJN, will step up after the retirement of Toshihiro Yamamoto on 1 January.
DJN will be led by Norihiro Kuretani and Wendy Clark remains in her role at DI.
The group also intends appointing four new independent outside directors who will add a wide variety of experience from different sectors including entertainment and finance. Further details will be provided nearer the time.
Quarterly progression
DJN particularly strong
As described above, and shown clearly in the exhibit below, the performance of DJN in Q321 was clearly outstanding and the Olympics/Paralympics will likely have played a major part, on top of an improvement in Japanese consumer confidence. There has been a resurgence in TV, media and out-of-home as well as continuing progress in digital. In terms of sectors, technology, beverages, financials and luxury goods were all highlighted.
While the quarter-on-quarter and year-on-year growth is clearly strong, the two-year stack (as is also being used across the industry to sidestep the issues that severely impacted sectoral revenues during the strictest pandemic lockdowns) also shows progress, with Q321 RLCoS up 1.7% on Q319.
Overall Q1-Q321 organic growth of RLCoS was 18.2% and full year guidance is for 17%, implying a slightly lower, but still strong, rate for Q421 of 15.1%.
Similarly, the operating margin achieved in the nine months of 2021 to date is 26.9%. Full-year margin guidance for DJN is 23.5%. Mechanistically, this reverses out to a Q421 operating margin of 18.0%. This looks compatible with the narrative of additional investment in talent and in IT, particularly to drive the customer transformation and technology offering.
Exhibit 1: DJN quarterly RLCoS progression |
Exhibit 2: DI quarterly RLCoS progression |
Source: Company |
Source: Company |
Exhibit 1: DJN quarterly RLCoS progression |
Source: Company |
Exhibit 2: DI quarterly RLCoS progression |
Source: Company |
DI good growth, with slight easing in Q3
DI reported organic growth of 13.4% in Q321, with particularly strength in Media (+17.3%) and CXM (+11.2%). Creative was slightly more challenging in EMEA and China, with live and experiential still affected by the pandemic restrictions and China affected by its exposure to the automotive industry. Operating margin for the quarter was 16.2%.
Looking at the nine-month figures, RLCoS was up 8.6%, delivering an operating margin of 13.7%. On a two-year stack, performance remains a little below FY19 levels, with APAC the most challenging region.
Full-year guidance is for DI to grow organically in ‘high single digits’. It is not possible to reverse this out precisely, as there has been the acquisition of LiveArea to take into account. In terms of the operating margin, management guidance is for 15.0% for the full year. With 13.7% recorded for the first nine months, here the implication is for a stronger operating margin in Q421 of 18.9%, which again is compatible with a narrative of a stronger top line on a cost base reduced by the transformation programme.
Revisions to forecasts
We have updated our forecasts in light of the progress made in the year to date and the raised management guidance for the full year. Figures were also lifted at the interim stage.
Exhibit 3: Summary forecast changes
Net revenue (¥bn) |
Underlying operating profit (¥bn) |
Underlying EPS (¥) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2020 |
835 |
835 |
124 |
124 |
250 |
250 |
|||
2021e |
937 |
967 |
+3 |
154 |
174 |
+13 |
336 |
378 |
-1 |
2022e |
978 |
1,000 |
+2 |
187 |
180 |
-4 |
376 |
385 |
+2 |
Source: Company, Edison Investment Research
The most notable change at this juncture is the increase in adjusted operating margin. This reflects the uplift in net revenue from the healthier trading environment delivering some operational gearing, but also the success to date of the accelerated transformation plan resulting in lower cost than had earlier been forecast, as explained in the segmental descriptions above.
Management is indicating a 30% earnings payout ratio (which will be stepped up to 35% over the next few years) and have now indicated a total dividend payment for FY21 of ¥113.5, up from the previous projection of ¥101.
Valuation
Exhibit 4: Peer group valuation
Company |
Price (local ccy) |
Market Cap (US$m) |
YTD (%) |
EV/Sales (x) |
EV/EBITDA (x) |
P/E (x) |
Dividend yield (%) |
||||
CY20 |
CY20 |
CY21 |
CY22 |
CY20 |
CY21 |
CY22 |
|||||
Omnicom |
US$70 |
14,794 |
12 |
1.2 |
7.6 |
6.5 |
6.4 |
14.1 |
11.3 |
10.8 |
3.7 |
WPP |
1109p |
17,498 |
39 |
1.5 |
10.2 |
8.8 |
8.2 |
19.3 |
14.5 |
12.8 |
0.0 |
Interpublic |
US$37 |
14,565 |
57 |
1.9 |
13.3 |
9.0 |
8.8 |
22.2 |
14.2 |
14.1 |
2.8 |
Publicis |
€59 |
17,118 |
45 |
1.8 |
8.4 |
7.6 |
7.2 |
15.2 |
12.1 |
11.6 |
3.4 |
Hakuhodo |
¥1941 |
6,359 |
37 |
1.9 |
11.2 |
9.1 |
8.1 |
27.3 |
23.0 |
19.3 |
1.5 |
Peer average |
|
|
38 |
1.7 |
10.1 |
8.2 |
7.7 |
19.6 |
15.0 |
13.7 |
2.3 |
Dentsu |
¥4275 |
11,299 |
39 |
1.4 |
13.1 |
6.2 |
5.0 |
17.2 |
11.4 |
11.2 |
1.7 |
Premium/(discount) |
|
|
1% |
-15% |
29% |
-24% |
-35% |
-12% |
-24% |
-19% |
-27% |
Source: Refinitiv. Note: Priced at 12 November 2021.
We now compare Dentsu with peers on FY21e and FY22e, rather than across FY20-22e, particularly as there is such clear management guidance for FY21e. On this basis, the shares are trading on an average discount of 30% on EV/EBITDA and 21% on P/E.
Exhibit 3: 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 |
1,068,700 |
1,125,000 |
Cost of Sales |
(85,832) |
(108,496) |
(104,201) |
(101,800) |
(125,000) |
||
Revenue less pass through costs |
932,680 |
939,385 |
835,042 |
966,900 |
1,000,000 |
||
EBITDA |
|
|
171,404 |
160,279 |
90,063 |
189,458 |
234,091 |
Normalised operating profit |
|
|
153,229 |
140,751 |
123,979 |
174,300 |
180,000 |
Amortisation of acquired intangibles |
(35,123) |
(34,806) |
(31,877) |
(29,857) |
(29,857) |
||
Exceptionals |
(2,149) |
(99,733) |
(229,631) |
97,619 |
0 |
||
Share-based payments |
(4,313) |
(9,568) |
(3,094) |
0 |
0 |
||
Reported operating profit |
111,638 |
(3,358) |
(140,625) |
243,400 |
150,143 |
||
Net Interest |
(17,714) |
(42,103) |
(1,419) |
(39,126) |
(36,457) |
||
Joint ventures & associates (post tax) |
2,699 |
517 |
910 |
0 |
0 |
||
Exceptionals |
52,128 |
2,175 |
0 |
(23,000) |
(3,000) |
||
Profit Before Tax (norm) |
|
|
190,342 |
101,340 |
123,470 |
135,174 |
140,543 |
Profit Before Tax (reported) |
|
|
148,751 |
(42,769) |
(141,134) |
181,274 |
110,686 |
Reported tax |
(51,250) |
(30,136) |
(11,162) |
(58,914) |
(33,538) |
||
Profit After Tax (norm) |
107,321 |
86,653 |
78,177 |
111,131 |
111,894 |
||
Profit After Tax (reported) |
97,501 |
(72,905) |
(152,296) |
122,360 |
77,148 |
||
Minority interests |
(7,185) |
(7,987) |
(7,299) |
(6,060) |
(6,060) |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
97,420 |
76,122 |
69,891 |
105,521 |
105,834 |
||
Net income (reported) |
90,316 |
(80,892) |
(159,595) |
116,300 |
71,088 |
||
Basic average number of shares outstanding (m) |
282 |
281 |
279 |
279 |
275 |
||
EPS - basic normalised (¥) |
|
|
346 |
271 |
250 |
378 |
385 |
EPS - diluted normalised (¥) |
|
|
346 |
271 |
249 |
376 |
383 |
EPS - basic reported (¥) |
|
|
320 |
(288) |
(571) |
417 |
259 |
Dividend (¥) |
90 |
95 |
71 |
114 |
121 |
||
Net revenue growth (%) |
6.3 |
0.7 |
(11.1) |
15.8 |
3.4 |
||
EBITDA Margin to revenue less pass-through costs (%) |
18.4 |
17.1 |
10.8 |
19.6 |
23.4 |
||
Normalised operating margin to revenue less pass-through costs (%) |
16.4 |
15.0 |
14.8 |
18.0 |
18.0 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
1,702,899 |
1,862,033 |
1,455,591 |
1,326,068 |
1,298,723 |
Intangible Assets |
1,036,772 |
1,000,313 |
800,551 |
898,288 |
875,681 |
||
Tangible Assets |
199,207 |
315,116 |
280,196 |
88,682 |
83,944 |
||
Investments & other |
466,920 |
546,604 |
374,844 |
339,098 |
339,098 |
||
Current Assets |
|
|
1,935,586 |
1,933,691 |
1,924,816 |
2,230,565 |
2,370,224 |
Stocks |
28,580 |
21,007 |
23,848 |
23,298 |
28,608 |
||
Debtors |
1,368,728 |
1,424,127 |
1,293,370 |
1,390,774 |
1,464,041 |
||
Cash & cash equivalents |
416,668 |
414,055 |
530,692 |
559,972 |
621,055 |
||
Other |
121,610 |
74,502 |
76,906 |
256,520 |
256,520 |
||
Current Liabilities |
|
|
(1,785,608) |
(1,821,881) |
(1,729,657) |
(1,810,058) |
(1,879,469) |
Creditors |
(1,341,461) |
(1,390,778) |
(1,247,172) |
(1,317,575) |
(1,386,986) |
||
Tax and social security |
(42,981) |
(17,689) |
(71,228) |
(71,228) |
(71,228) |
||
Short term borrowings |
(104,879) |
(184,816) |
(72,533) |
(82,533) |
(82,533) |
||
Other |
(296,287) |
(228,598) |
(338,724) |
(338,722) |
(338,722) |
||
Long Term Liabilities |
|
|
(742,129) |
(883,971) |
(800,985) |
(752,269) |
(752,269) |
Long term borrowings |
(433,979) |
(439,110) |
(512,274) |
(463,558) |
(463,558) |
||
Other long term liabilities |
(308,150) |
(444,861) |
(288,711) |
(288,711) |
(288,711) |
||
Net Assets |
|
|
1,110,748 |
1,089,872 |
849,765 |
994,305 |
1,037,209 |
Minority interests |
(63,129) |
(77,556) |
(63,483) |
(69,543) |
(75,603) |
||
Shareholders' equity |
|
|
1,047,619 |
1,012,316 |
786,282 |
924,762 |
961,606 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
208,490 |
47,198 |
(55,166) |
265,222 |
194,634 |
||
Working capital |
7,866 |
(28,254) |
(22,538) |
(26,451) |
(9,166) |
||
Exceptional & other |
(35,011) |
148,452 |
213,845 |
(31,401) |
4,580 |
||
Tax |
(48,296) |
(87,439) |
(47,828) |
(98,040) |
(69,995) |
||
Net operating cash flow |
|
|
133,049 |
79,957 |
88,313 |
109,330 |
120,053 |
Capex |
(31,322) |
(31,000) |
(19,948) |
157,360 |
(8,746) |
||
Acquisitions/disposals |
(50,555) |
(47,860) |
(26,585) |
(130,820) |
(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) |
(31,373) |
(32,225) |
||
Other |
10,768 |
(35,674) |
141,820 |
(669) |
0 |
||
Net Cash Flow |
29,873 |
(84,616) |
144,022 |
73,828 |
61,082 |
||
Opening net debt/(cash) |
|
|
154,752 |
122,190 |
209,870 |
54,115 |
(13,881) |
FX |
(18,281) |
1,490 |
(12,071) |
(5,832) |
0 |
||
Other non-cash movements |
20,970 |
(4,554) |
23,804 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
122,190 |
209,870 |
54,115 |
(13,881) |
(74,964) |
Source: Dentsu, Edison Investment Research
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|||
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Research: TMT
EQS Group’s Q3 figures show the boost given to its whistleblowing offering by the June acquisition of Business Keeper, lifting the total number of whistleblowing customers to around 1,500. Implementation of the EU Directive into national legislations is delayed in a number of territories, but the direction of travel is set and the timetable slippage should only be one or two quarters. The additional sales and marketing costs were already factored into our estimates (in line with management guidance for FY21), which are unchanged. We regard the scale of the opportunity as worth the short-term impact on EBITDA.
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