Investing In Integrated Growth Solutions And Modern Media Will Drive Competitiveness In Future Markets

Key Takeaways

• The midterm management plan targets profitability by reevaluating underperforming businesses and implementing cost control measures to improve net margins by 2027.
  
• Strategic focus on integrated growth and large markets with strong positions aims to enhance competitiveness, market share, and shareholder value.
  
• Significant statutory loss due to goodwill impairment highlights risks in international operations, with challenges in growth, competitive pressures, and dependency on internal reforms impacting earnings.

Catalysts

Operates in the advertising business in Japan, the Americas, Europe, the Middle East and Africa, and the Asia Pacific.

• The new midterm management plan focuses on restoring profitability by reevaluating underperforming businesses and rebuilding the business foundation, which could improve net margins and earnings by 2026 and 2027.
  
• Investment in strengthening integrated growth solutions and focusing on modern media, such as programmatic and retail media, aims to enhance competitiveness and drive revenue growth.
  
• The company plans to concentrate efforts on large markets like Japan and the United States, and selectively strengthen markets where they hold strong positions, which could lead to increased revenue and market share.
  
• Implementation of cost control initiatives and simplification of operations is expected to reduce operating costs by up to ¥50 billion by 2027, potentially improving net margins.
  
• The focus on creating a more integrated and efficient organization, along with a disciplined approach to capital allocation and M&A, aims to enhance shareholder value and achieve a target ROE in the mid-teens range by 2027, supporting earnings per share growth.

Dentsu Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dentsu Group's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -13.6% today to 5.6% in 3 years time.
• Analysts expect earnings to reach ¥84.8 billion (and earnings per share of ¥325.52) by about March 2028, up from ¥-192.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥97.3 billion in earnings, and the most bearish expecting ¥73.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from -4.5x today. This future PE is lower than the current PE for the JP Media industry at 17.0x.
• Analysts expect the number of shares outstanding to decline by 1.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.91%, as per the Simply Wall St company report.

Dentsu Group Future Earnings Per Share Growth

Risks

• The recording of a significant statutory loss in FY 2024 due to a goodwill impairment loss, mainly in EMEA and the Americas, highlights the potential risks in their international operations and could pressure future revenue and earnings.
  
• The international businesses, particularly in the Americas and APAC, faced challenges, including negative organic growth, slow recovery, and client budget reductions, which could impact net margins and overall profitability.
  
• The firm's dependency on internal and structural reforms, including rebuilding its business foundation and evaluating underperforming businesses, implies potential risks and costs that could affect near-term earnings.
  
• Competitive pressures, such as shifts towards requiring more advanced technical integrations like AI and changes in media management, suggest risks to Dentsu's growth if they cannot keep pace, potentially affecting revenue.
  
• The stated need to strengthen its international media operations shows existing competitive gaps that, if not addressed successfully, could hinder future revenue growth and impact long-term earnings.

Valuation

• The analysts have a consensus price target of ¥3777.5 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 2028, revenues will be ¥1516.6 billion, earnings will come to ¥84.8 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of ¥3344.0, the analyst price target of ¥3777.5 is 11.5% higher.
  
• 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.