REPEAT: oOh!media Attracts Attention

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This story has been re-published to correct erroneous information regarding APN Outdoor in paragraph six. FNArena apologizes for any potential confusion caused.

-Outdoor growth outstrips
-Margin expansion expected
-Superior return profile
 

By Eva Brocklehurst

Travelling through Australia's countryside the business of oOh!media ((OML)) is well evident, as the company has a dominant position in roadside billboards. Scale and incumbency provide a significant competitive advantage for the newly-listed media company, but that is not all. Digital technology's relentless enhancements mean the potential in Out-of-Home advertising for targeting audiences and achieving more flexible advertising campaigns is growing significantly, more so than the broader advertising market.

Digital platforms allow for multiple faces which can attract additional revenue to a single site and increase yields. Historically, a deterrent for using of this type of advertising was the cost and time required for production and installation, and the fixed nature of the message. Digital developments change all that, enhancing flexibility in terms of message and length of time for promotional advertising.

As an operator with scale in this area, oOh!media is well placed and Macquarie initiates coverage on the stock with an Outperform rating and $2.65 price target. oOh!media has a mostly fixed cost base, meaning incremental margins on new revenue are high. Revenue growth on the back of digital investment is a key driver behind an expected expansion in margins, to 18.2% in 2015 from 12.4% in 2012. This underpins the prospectus forecasts for 2013-15 and a compound earnings growth rate of 21.4%.

Out-of-Home advertising includes billboards, airport, social & retail centre signage, as well as street furniture – in which oOh!media does not participate. Growth in this market has remained strong at over 10% in 2014 and oOh!media has 34% of the segment revenue in Australia. Out-of-Home advertising growth has outpaced the broader advertising market over the past 10 years and Macquarie attributes this to growing target audiences, particularly as audiences have become fragmented in other media. oOh!media has a broad portfolio with over 2,000 leases and the top 20 concessions represented less than 43% of 2013 revenue.

Macquarie estimates the market share for this segment has grown to 4.5% currently, from 3.1% in 2003. Digital investment in the segment's assets has transformed both the industry and the company. Upgrading relevant sites to digital increases the available inventory, flexibility and creative opportunities for advertisers. JP Morgan also initiates coverage with an Overweight rating and $2.28 target. The broker believes the market structure supports a superior return profile, as there are high barriers to entry and constraints to supply through lengthy regulatory processes.

The company is one of two major operators in roadside billboards, with the other key player being APN Outdoor Group ((APO)), which has a market share of 27% on Macquarie's estimates. APN Outdoor was formerly part of APN News And Media ((APN)), sold to Quadrant Private Equity in two tranches and subsequently listed on the ASX at the end of last year. There are high barriers to roadside advertising, given lengthy processes for approvals and the value of incumbency. AdShel, which has 13%, and JCDecaux, around 11%, of the segment market, both focus on street furniture and make up the other significant players.

The segment remains highly competitive and oOh!media does face risks from competitors and disruptive technologies, as it may lose key contracts or renew existing contracts on less favourable terms. Advertising markets are also volatile and there is a risk the company cannot generate required returns on digital investments.

Regional markets, which represent around 15-20% of the company's roadside revenues, are highly diversified with a long tail of single-site concession holders. In Macquarie's view this gives oOh!media a unique national audience with scale that is not accessible for other operators in the Out-of-Home segment. There is scope for consolidation with the larger players – AdShel or JCDecaux – but it is not clear if there is any desire for this. A merger with APN Outdoor would create a player with over 60% of the market but is unlikely to be permitted by the competition regulator.
 

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