AI And Merkury For Media Launch Fuel Growth In Key Markets

Key Takeaways

• Strategic focus on data, technology, AI, and major markets like Japan and the US aims for revenue growth and enhanced service models.
  
• Integration and talent development under One Dentsu model to improve client acquisition, operational efficiency, and competitiveness.
  
• Dentsu faces profitability challenges due to high costs, struggling CXM business, geopolitical risks, revised growth expectations, and heavy reliance on Japan and U.S. markets.

Catalysts

Operates in the advertising business in Japan and internationally.

• Dentsu's focus on data, technology, and AI, including the official launch of Merkury for Media, aims to enhance their service offerings, potentially impacting future revenue growth positively by integrating advanced solutions and analytics capabilities to meet client needs.
  
• The group's strategic emphasis on Japan and the United States, which are major revenue contributors, suggests concentrated efforts to grow in these high-priority markets, likely positively affecting revenue through targeted resource allocation and service model enhancements.
  
• Strengthening integration of services across Media, Creative, and CXM is intended to improve client win rates and attract larger accounts, potentially leading to increased net revenue and improved operating margins through efficiency gains from cross-selling opportunities.
  
• Internal investment in developing talent along with cost management under the One Dentsu model is expected to build competitive advantages and optimize expenses, which could improve net margins and operational efficiencies over time.
  
• Continued investment in key strategic areas and focus on high-growth prospects are intended to outperform market growth by 2027, aiming for substantial revenue growth and overall competitiveness, which could drive long-term earnings growth.

Dentsu Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dentsu Group's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.2% today to 6.5% in 3 years time.
• Analysts expect earnings to reach ¥100.7 billion (and earnings per share of ¥388.94) by about December 2027, up from ¥-31.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥118.7 billion in earnings, and the most bearish expecting ¥72.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2027 earnings, up from -33.9x today. This future PE is lower than the current PE for the JP Media industry at 14.8x.
• Analysts expect the number of shares outstanding to decline by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.64%, as per the Simply Wall St company report.

Dentsu Group Future Earnings Per Share Growth

Risks

• Dentsu's operating margin decreased by 140 basis points in the third quarter due to higher staff costs and trade receivable allowances, potentially impacting profitability if such costs are not controlled effectively in the future.
  
• The CXM (Customer Transformation and Management) business remains in decline, particularly in APAC and the Americas, which may negatively affect overall revenue growth if recovery continues to lag expectations.
  
• Net profit has decreased significantly due to expenses related to the completion of the transfer of Russian operations, highlighting risks related to geopolitical factors and restructuring costs affecting net margins.
  
• The downward revision of the full-year organic growth rate and operating margin guidance reflects challenges in achieving expected financial targets, suggesting potential weaknesses in overall revenue and earnings outlook.
  
• A high dependence on Japan and the U.S. for revenue concentration might limit growth opportunities elsewhere and expose the company to regional economic fluctuations that could impact revenue diversity.

Valuation

• The analysts have a consensus price target of ¥4232.86 for Dentsu Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥5300.0, and the most bearish reporting a price target of just ¥3100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥1554.8 billion, earnings will come to ¥100.7 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 5.6%.
• Given the current share price of ¥4057.0, the analyst's price target of ¥4232.86 is 4.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.