Treasure Chest: Opportunity In oOh!media

This story features OOH!MEDIA LIMITED. For more info SHARE ANALYSIS: OML

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Is there an opportunity in outdoor advertiser oOh!media? Goldman Sachs joins the believers, initiating coverage of the stock

-Ex aviation, out-of-home advertising is at or nudging pre-pandemic levels
-Overweight exposure to road digital advertising stands oOh!media in good stead
-Main risk is contract renewals while acquisition opportunities are now rare
 

By Eva Brocklehurst

In an industry that has experienced significant consolidation over recent years, out-of-home advertiser oOh!media ((OML)) is still on a growth path. Its operations and opportunities in both static and digital signage exist across several segments, including roads, retail and airports, and structural growth is anticipated despite short-term headwinds stemming from the pandemic.

While oOh!media has been adversely affected by the pandemic its profitability is seen returning amid cost reductions. Macquarie noted at the first half results that the out-of-home segment was catching up quickly to a recovery in general media advertising.

Road, retail and commuter segments are likely to normalise the quickest, with Goldman Sachs pointing to June 2021 data that signals, relative to pre-pandemic levels, road traffic is 100-110% and retail traffic 90-105%, public transport 70-80% and aviation at 30%.

The broker envisages pre-pandemic levels of advertising will be reached by 2022 and the company's share of the advertising market should reach more than 7% by FY25. Goldman Sachs anticipates a recovery in advertising markets in 2021 although the company's complete recovery may be delayed until 2023.

In terms of international travel affecting airport revenue, the broker anticipates this will be back at pre-pandemic levels by FY24. Macquarie points out airport billboards accounted for only 10% of revenue in 2019, although ascertains there is growth potential when borders eventually re-open.

Driving the positive view on the stock is dwelling density, traffic congestion and technological improvements. The business has scale in Australasia and a strong balance sheet. Hence, Goldman Sachs considers oOh!media a quality cyclical stock with a compelling valuation and initiates coverage with a Buy rating and $2.10 target.

The pandemic is just a blip, in the broker's view, in what is a structural growth story over the long-term. Credit Suisse agrees, noting at the AGM update that the outlook had become relatively stable and calculates, at 6.9x forward earnings, oOh!media is the cheapest out-of-home stock globally.

The broker expects 2021 revenue at around 87% of pre-pandemic levels and a recoup of the remainder in 2022. Macro conditions are very conducive to expanded media budgets, the broker adds, and there are material opportunities for improvement off depressed bases in the aviation and office segments.

Digital

The main feature that excites Goldman Sachs is the robust growth in digital revenue, albeit at a slower pace because of a maturing market. Digital now account for 61% of industry revenue. Digital revenues drive higher yields because of the more creative advertising and use of video, as well as a more selective time of day to display ads that provides better yield management.

The roadside segment has been one of the leaders for digital penetration, which the broker estimates makes up more than half of all roadside revenue. In this area, the company has an overweight exposure, with industry numbers suggesting it would have more than 40% share.

The bulk of prime sites have been converted to digital billboards so Goldman Sachs envisages industry growth will be driven by street furniture. This has experienced a slower digital take-up because of the complexity of local government regulations and capital intensity.

The main risk is competition and contract renewals. Subsequent to the consolidation that has taken place over the past few years, competition has been rationalised and JC Decaux, the other major player in the segment, is renewing its focus on investment in the Australian market.

The two companies now have a combined share of the Australian market of around 60-70%. Hence, contract renewals could provoke more competition compared with the times when the sector was fragmented. Credit Suisse finds trends underpinning its investment thesis intact and even if oOh!media lost the Sydney Trains contract this would not change its view.

Acquisition opportunities are now more rare but oOh!media has scale to drive further market share gains. There is opportunity for the company to grow in New Zealand as well as in particular areas for street furniture, such as Sydney's eastern suburbs.

Goldman Sachs calculates 60% of contracts are not up for renewal until after FY23 and no individual concession is worth more than 6% of group revenue. The digitisation of the inventory is largely complete so capital expenditure is likely to ease back and as a percentage of sales decrease to 7.5% by FY25 compared with 9% in FY19.

As a result the broker expects a resumption of dividends in FY23. Moreover, cash generation should improve and enable deleveraging. FNArena's database has two Buy ratings and one Hold (Ord Minnett) with a consensus target of $2.10 that signals 25% upside to the last share price.

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