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Currency in JPY
Last close As at 09/06/2023
JPY4,520.00
▲ −8.00 (−0.18%)
Market capitalisation
JPY1,221,146m
Research: TMT
A strong Q4 performance in recovering markets means Dentsu has posted good figures for FY21 and enters FY22 with positive momentum, particularly in the Customer Transformation and Technology (CT&T) activities. The strategic plan remains to build this area to 50% of revenue less cost of sales (RLCoS), from 29.1% in FY21. Medium-term guidance for group organic growth in RLCoS is upgraded from 3–4% to 4–5%, with 4% guided for FY22. A ¥40bn share buyback is planned, funded from year-end net cash following September’s sale (and leaseback) of the Shiodome building. The share price remains at a substantial discount to peers.
Dentsu Group |
Upgrade to organic growth guidance |
FY21 results |
Media |
15 February 2022 |
Share price performance
Business description
Next events
Analysts
Dentsu Group is a research client of Edison Investment Research Limited |
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A strong Q4 performance in recovering markets means Dentsu has posted good figures for FY21 and enters FY22 with positive momentum, particularly in the Customer Transformation and Technology (CT&T) activities. The strategic plan remains to build this area to 50% of revenue less cost of sales (RLCoS), from 29.1% in FY21. Medium-term guidance for group organic growth in RLCoS is upgraded from 3–4% to 4–5%, with 4% guided for FY22. A ¥40bn share buyback is planned, funded from year-end net cash following September’s sale (and leaseback) of the Shiodome building. The share price remains at a substantial discount to peers.
Year end |
Net revenue (¥bn) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/20 |
835.0 |
123.5 |
250 |
71 |
17.2 |
1.6 |
12/21 |
976.6 |
146.0 |
389 |
118 |
11.1 |
2.7 |
12/22e |
1,059.2 |
165.4 |
404 |
130 |
10.7 |
3.0 |
12/23e |
1,102.2 |
173.2 |
423 |
141 |
10.2 |
3.3 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Broad-based strength in Q421
The good performance in Q421 was across both Dentsu Japan Network (DJN) and Dentsu International (DI), with the former posting organic progress at the RLCoS level of 17.3% and the latter 12.1%. Within DI, a very strong Media performance in the Americas in December lifted Q421 organic revenue growth there to 15.4%, despite tougher comparatives in Customer Experience Management (CXM). The cyclical recovery across the year delivered group FY21 organic RLCoS growth of 13.1%, with an underlying operating margin of 18.3%, up 350bp on the prior year. We have set our FY22 forecasts to match management guidance (an upgrade of 4% at the underlying operating profit level, with a margin of 17.7%) and initiated forecasts for FY23, with RLCoS up 4% year-on-year.
Acquisition fund to drive medium-term growth
A transformed balance sheet (year-end net cash of ¥144.4bn) allows management to drive investment to deliver growth, with an upper limit on leverage at 1.5x year-end net debt/EBITDA (medium-term target range of 1.0–1.5x). The top priority is capex, where ¥70bn of spend is identified across FY22–24. Second, a fund of ¥250–300bn for M&A is allocated over the same period, prioritising development in CT&T, alongside capability and geographic infill. As guided, the dividend payout ratio is set to lift from 30% in FY21, to 32% in FY22e and to 35% by FY24e. ¥40bn is also earmarked for a share buyback across FY22, with a maximum of 20m shares.
Valuation: Overstated discount
The share price has recovered from the dip in November last year and is now 21% off the low hit in early December. Across FY21–23e, the shares still sit at a substantial valuation discount to the peer set of 27% on EV/EBITDA and 23% on P/E. Given the improving quality of business with the increased emphasis on digital transformation, we still believe this differential is overstated.
Progress along planned lines
Q421 closed strongly for DJN and DI, with the group in much better shape given the simplification of the structure and costs that have been taken out of the business under the accelerated transformation plan (described in detail in our initiation report). These cost savings were previously guided at the group level of ¥75bn annualised from FY22 (of which ¥50bn falling in FY21).
The operational changes carried out in FY21 across the group should enable Dentsu to benefit to a greater extent from the structural shifts in the global market, with the burgeoning demand from corporate clients to transform their businesses to enhance and upscale their digital approach. The proportion of RLCoS from CT&T rose to 29.1% for the year, from 27.5% in FY20. The percentage at DJN was flat at 24.4% but rose to 32.6% at DI (FY20: 29.7%), helped by favourable currency movements. The reorientation of the group is regarded as a continuing process, with the structural trend given an additional impetus by the effects of the pandemic, highlighting the importance of businesses having a multi-dimensional understanding of their own customers. The marriage of data with creativity and technology is regarded as key.
The objective is to build CT&T to half of the group revenue base over (unspecified) time, fuelled by internal organic growth and supplemented by M&A, with the hypothecation of a fund of ¥250–300bn to be applied across FY22–24e. We would anticipate that average deal size would be ahead of the ¥25–30bn region typical historically. LiveArea, bought in Q321, and already rebranded as part of Merkle within DI, has been reported to have cost around ¥250m, although the price has not been formally disclosed. LiveArea registered an impressive organic growth rate of over 30% in Q421. Acquisitions of ¥50bn and subsidiary investments of ¥107bn are disclosed in the FY21 summary cash flow statement.
The proportion of RLCoS from the digital domain was 35.7% (+0.9%) for DJN but decreased to 61.8% for DI (-5.7%), with the proportion diluted by a particularly strong showing from the Media segment as confidence stepped up more sharply towards the close of the year.
|
Exhibit 1: DJN quarterly RLCoS progression |
Exhibit 2: DI quarterly RLCoS progression |
|
|
|
Source: Dentsu Group |
Source: Dentsu Group |
|
Exhibit 1: DJN quarterly RLCoS progression |
|
|
Source: Dentsu Group |
|
Exhibit 2: DI quarterly RLCoS progression |
|
|
Source: Dentsu Group |
Upgrade to FY22 forecast, new FY23e figures
We upgraded on the back of increased management guidance at the time of the Q321 figures in November, but, as described above, the fourth quarter performance was also better than had earlier been anticipated.
Exhibit 3: Summary changes to forecasts
Revenue LCoS (¥bn) |
Underlying operating profit (¥bn) |
EPS (¥) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2021 |
966.9 |
976.6 |
+1 |
174.3 |
179.0 |
+3 |
378 |
389 |
+3 |
2022e |
1,000.0 |
1,059.2 |
+6 |
180.0 |
187.9 |
+4 |
385 |
404 |
+5 |
2023e |
- |
1,102.2 |
N/A |
- |
195.2 |
N/A |
- |
423 |
N/A |
Source: Dentsu Group accounts, Edison Investment Research
We now move our FY22e RLCoS forecast up to the level guided by management at ¥1,059bn, which represents an increase over the prior year of 8.5%. At the organic growth level, this equates to 4% for the group, being a blend of 2–3% at DJN and 4-5% at DI.
The new guided underlying operating profit of ¥187.9bn, is a 5% improvement over that achieved in FY21, so a slight diminution of underlying operating margin to 17.7% from 18.3%. This is the impact of the additional investment being made over the medium term to position the group to take advantage of these longer-term growth opportunities. Management anticipates a flat underlying operating margin at DI (15.9% in FY21), and a more pronounced dip for DJN from 22.9% to 22.0%.
We are now publishing our FY23e figures, which we base on a conservative growth assumption for RLCoS of 4.1%, at the lower end of the newly increased medium-term guided range of 4–5%, and with a reasonably stable underlying operating margin. The dividend payout ratio is set to increase towards 35% in FY24e, so we have set our modelling for FY23e at 33.3%, following 32% for FY22e (as guided), up from 30% for FY21.
Cash and leverage give plenty of M&A firepower
The group bought back ¥30bn of shares in FY21. While we have built the FY22e planned ¥40bn share buyback into our cashflow modelling, we will only include acquisitions as and when they complete.
The end-FY21 balance sheet shows total debt of ¥579.2bn, with cash and cash equivalents if ¥723.5bn. The proceeds from the sale and leaseback of the Shiodome headquarters building comprised ¥305.2bn. Further asset sales are possible but are not likely to be on the same scale.
With ¥144.4bn in net cash on the balance sheet at end FY21, there is obviously plenty of scope for M&A spend over and above the fund being set aside specifically to support the expansion in CT&T.
Valuation: Discount remains substantial
We consider Dentsu’s valuation in the context of the major global marketing services holding companies. Omnicom, Publicis and Interpublic have all published their FY21 figures and the upswing in demand has been apparent across the board. WPP is set to publish its figures on 24 February.
From the table below, it is clear that Dentsu’s valuation remains at a marked discount to global peers, averaging 27% across EV/EBITDA and 23% on a P/E basis across FY21–23e.
Exhibit 4: Peer valuation, performance
|
Price |
Market cap |
YTD |
EV/sales (x) |
EV/EBITDA (x) |
P/E (x) |
Dividend yield |
FY21 organic growth |
|||||
Company |
(local ccy) |
(US$m) |
(%) |
CY21 |
CY21 |
CY22 |
CY23 |
CY21 |
CY22 |
CY23 |
(%) |
(%) |
|
Omnicom |
US$86 |
18,047 |
17 |
1.5 |
8.8 |
8.7 |
8.4 |
14.1 |
13.8 |
12.8 |
3.1 |
8.5 |
|
WPP |
1214p |
18,829 |
9 |
1.6 |
9.6 |
8.9 |
8.3 |
16.1 |
14.1 |
12.4 |
2.5 |
|
|
Interpublic |
US$36 |
15,530 |
5 |
1.8 |
9.4 |
8.8 |
8.6 |
15.2 |
15.0 |
14.2 |
2.7 |
11.9 |
|
Publicis |
€65 |
18,846 |
10 |
1.8 |
8.0 |
7.4 |
7.2 |
13.0 |
12.1 |
11.7 |
4.6 |
10.0 |
|
Hakuhodo |
¥1,589 |
5,361 |
-19 |
0.5 |
7.4 |
6.9 |
6.5 |
16.5 |
14.9 |
13.9 |
1.6 |
|
|
Peer average |
|
4 |
1.4 |
8.6 |
8.1 |
7.8 |
15.0 |
14.0 |
13.0 |
2.9 |
10.1 |
||
Dentsu |
¥4,380 |
10,938 |
7 |
1.4 |
6.2 |
5.9 |
5.7 |
11.2 |
10.8 |
10.4 |
2.7 |
13.1 |
|
Premium/(discount) |
|
2% |
2% |
-28% |
-27% |
-27% |
-25% |
-23% |
-20% |
-7% |
30% |
||
Source: company accounts, Refinitiv. Note: Prices at 11 February.
Exhibit 5: Financial summary
¥m |
2019 |
2020 |
2021e |
2022e |
2023e |
|||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
INCOME STATEMENT |
||||||||
Revenue |
|
|
1,047,881 |
939,243 |
1,085,592 |
1,200,000 |
1,250,000 |
|
Cost of Sales |
(108,496) |
(104,201) |
(109,015) |
(140,800) |
(147,700) |
|||
Revenue less pass through costs |
939,385 |
835,042 |
976,577 |
1,059,200 |
1,102,224 |
|||
EBITDA |
|
|
160,279 |
90,063 |
195,006 |
203,878 |
211,153 |
|
Normalised operating profit |
|
|
140,751 |
123,979 |
179,028 |
187,900 |
195,175 |
|
Amortisation of acquired intangibles |
(34,806) |
(31,877) |
(29,409) |
(31,379) |
(31,379) |
|||
Exceptionals |
(99,733) |
(229,631) |
94,368 |
0 |
0 |
|||
Share-based payments |
(9,568) |
(3,094) |
0 |
0 |
0 |
|||
Reported operating profit |
(3,358) |
(140,625) |
241,841 |
156,521 |
163,796 |
|||
Net Interest |
(42,103) |
(1,419) |
(35,491) |
(32,716) |
(32,351) |
|||
Joint ventures & associates (post tax) |
517 |
910 |
2,484 |
10,200 |
10,404 |
|||
Exceptionals |
2,175 |
0 |
0 |
0 |
0 |
|||
Profit Before Tax (norm) |
|
|
101,340 |
123,470 |
146,021 |
165,385 |
173,229 |
|
Profit Before Tax (reported) |
|
|
(42,769) |
(141,134) |
208,834 |
134,005 |
141,849 |
|
Reported tax |
(30,136) |
(11,162) |
(93,979) |
(34,528) |
(46,243) |
|||
Profit After Tax (norm) |
86,653 |
78,177 |
116,254 |
117,778 |
121,260 |
|||
Profit After Tax (reported) |
(72,905) |
(152,296) |
114,853 |
99,477 |
95,606 |
|||
Minority interests |
(7,987) |
(7,299) |
(6,463) |
(6,478) |
(6,669) |
|||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
|||
Net income (normalised) |
76,122 |
69,891 |
109,203 |
109,557 |
114,591 |
|||
Net income (reported) |
(80,892) |
(159,595) |
108,390 |
93,000 |
88,937 |
|||
Average Number of Shares Outstanding (m) |
281 |
279 |
279 |
269 |
269 |
|||
EPS - normalised (¥) |
|
|
271 |
250 |
392 |
407 |
425 |
|
EPS - normalised fully diluted (¥) |
|
|
271 |
249 |
389 |
404 |
423 |
|
EPS - basic reported (¥) |
|
|
(288) |
(571) |
389 |
345 |
330 |
|
Dividend (¥) |
95 |
71 |
118 |
130 |
141 |
|||
Net revenue growth (%) |
0.7 |
(11.1) |
16.9 |
8.5 |
3.3 |
|||
EBITDA Margin to revenue less pass-through costs (%) |
17.1 |
10.8 |
20.0 |
19.2 |
19.3 |
|||
Normalised operating margin to revenue less pass-through costs (%) |
15.0 |
14.8 |
18.3 |
17.7 |
17.8 |
|||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
1,862,033 |
1,439,542 |
1,305,203 |
1,315,971 |
1,323,739 |
|
Intangible Assets |
1,000,313 |
784,502 |
858,748 |
874,254 |
886,760 |
|||
Tangible Assets |
315,116 |
280,196 |
88,682 |
83,944 |
79,206 |
|||
Investments & other |
546,604 |
374,844 |
357,773 |
357,773 |
357,773 |
|||
Current Assets |
|
|
1,933,691 |
1,924,816 |
2,214,088 |
2,374,745 |
2,487,498 |
|
Stocks |
21,007 |
23,848 |
26,880 |
34,718 |
38,392 |
|||
Debtors |
1,424,127 |
1,293,370 |
1,386,767 |
1,532,915 |
1,596,787 |
|||
Cash & cash equivalents |
414,055 |
530,692 |
723,541 |
730,213 |
777,374 |
|||
Other |
74,502 |
76,906 |
76,899 |
76,899 |
76,899 |
|||
Current Liabilities |
|
|
(1,821,881) |
(1,759,071) |
(1,883,417) |
(2,032,303) |
(2,097,372) |
|
Creditors |
(1,390,778) |
(1,247,172) |
(1,412,757) |
(1,561,643) |
(1,626,712) |
|||
Tax and social security |
(17,689) |
(71,228) |
(71,228) |
(71,228) |
(71,228) |
|||
Short term borrowings |
(184,816) |
(72,533) |
(72,533) |
(72,533) |
(72,533) |
|||
Other |
(228,598) |
(368,138) |
(326,899) |
(326,899) |
(326,899) |
|||
Long Term Liabilities |
|
|
(883,971) |
(800,985) |
(726,400) |
(720,783) |
(715,166) |
|
Long term borrowings |
(439,110) |
(512,274) |
(506,657) |
(501,040) |
(495,423) |
|||
Other long term liabilities |
(444,861) |
(288,711) |
(219,743) |
(219,743) |
(219,743) |
|||
Net Assets |
|
|
1,089,872 |
804,302 |
909,474 |
937,629 |
998,858 |
|
Minority interests |
(77,556) |
(63,483) |
(64,440) |
(70,918) |
(77,587) |
|||
Shareholders' equity |
|
|
1,012,316 |
740,819 |
845,034 |
866,711 |
921,111 |
|
CASH FLOW |
||||||||
Operating Cash Flow |
47,198 |
(55,166) |
254,221 |
181,363 |
189,207 |
|||
Working capital |
(28,254) |
(22,538) |
69,155 |
(5,098) |
(2,481) |
|||
Exceptional & other |
148,452 |
213,845 |
(59,307) |
3,307 |
2,942 |
|||
Tax |
(87,439) |
(47,828) |
(149,880) |
(67,244) |
(78,594) |
|||
Net operating cash flow |
|
|
79,957 |
88,313 |
114,189 |
112,327 |
111,074 |
|
Capex |
(31,000) |
(19,948) |
305,200 |
(8,746) |
(8,746) |
|||
Acquisitions/disposals |
(47,860) |
(26,585) |
(49,672) |
(18,000) |
(15,000) |
|||
Net interest |
0 |
0 |
0 |
0 |
0 |
|||
Equity financing |
(20,008) |
(10,004) |
(30,010) |
(40,000) |
0 |
|||
Dividends |
(30,031) |
(29,574) |
(23,473) |
(33,293) |
(36,508) |
|||
Other |
(35,674) |
141,820 |
(108,773) |
0 |
0 |
|||
Net Cash Flow |
(84,616) |
144,022 |
207,461 |
12,369 |
50,820 |
|||
Opening net debt/(cash) |
|
|
122,190 |
209,870 |
54,115 |
(144,351) |
(156,640) |
|
FX |
1,490 |
(12,071) |
(8,995) |
0 |
0 |
|||
Other non-cash movements |
(4,554) |
23,804 |
0 |
0 |
0 |
|||
Closing net debt/(cash) |
|
|
209,870 |
54,115 |
(144,351) |
(156,640) |
(207,460) |
|
Source: Company accounts, Edison Investment Research
|
|
Research: TMT
Alongside the announcement of two small acquisitions in Germany, CentralNic’s management has confirmed continuing high organic revenue growth in Q122 (FY21: 37%), driven largely by the performance of the online marketing segment. Management is still acquiring strategic assets as part of its vertical integration strategy, with the Fireball Search and .ruhr top-level domain (TLD) deals bought for total cash consideration of €0.6m, at implied multiples of 0.3x sales and 0.6x EBITDA. The acquisitions are expected to be immediately earnings accretive. The continued segmental growth underlines that CentralNic’s privacy-safe approach to online marketing, is proving both resilient and attractive. We have yet to revise our forecasts, which we will review with the FY21 preliminary results, expected on 28 February. However, CentralNic trades on an undemanding rating given its robust growth, with management confident of the full-year outlook.
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