APN Outdoor Grows Fast In Fast-Growing Market

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-Stock has re-rating potential
-Wins Sydney Airport T2 contract
-Debt vs earnings ratio to fall
 

By Eva Brocklehurst

APN Outdoor ((APO)) is growing fast in a fast-growing market segment – billboards. As traditional media splinters and advertising effectiveness dissipates, advertisers have increasingly turned to billboards as a means of getting the message across. This is even more the case with the emergence of smart or digital billboards, which improve the impact of the medium. Hence, Morgans envisages another five years of solid growth ahead for the company. The broker notes the outdoor advertising sector has been the second fastest growing advertising medium, after online, in the past decade.

Morgans initiates coverage on the stock with an Add rating and $3.54 target. Conversion of static outdoor billboards to higher yielding digital billboards over the next few years will be the catalyst for growth, in the broker's opinion. APN Outdoor trades at a material discount to comparable listed outdoor advertising companies and has re-rating potential, with a continuation of recent growth rates and the digital conversion the main catalysts.

The company had 34 digital billboards in operation at the end of 2014. Demand is high and yields are attractive. Morgans observes outdoor advertising has high fixed costs built on long-term site leases while revenue is short term, with site bookings made typically no more than 30-60 days prior to ad placement. The main risks, therefore, relate to a slowing in digital conversions or the loss of a major leasing contract, as outdoor advertising companies are highly dependent on economic activity and advertising spending. Still, the risks are probably no higher than for any other media, the broker maintains.

UBS observes the company has renewed its Sydney Airport T1 external contract, the only one due for renewal in 2015, and acquired the T2 internal contract, pushing out incumbent competitor oOh!Media ((OML)). The new T2 contract will commence from October 2015. Earnings impact is likely to be modest as airports remain APN Outdoor's least profitable division, the broker contends. Still, UBS acknowledges the renewal of the Sydney Airport contract alleviates some contract risk and suggests 2015 prospectus forecasts will be met.

The broker notes the outdoor market was up 16% in January, although forward comparables will be tougher. UBS maintains a Buy rating and $3.15 target. The broker considers the stock attractive on current metrics, with a 3.0% dividend yield, and maintains a Buy rating and $3.15 target. The balance sheet suggests the net debt to earnings ratio will fall to 0.2 in 2018 from 1.7 in 2014, paving the way for potential capital management and/or M&A options.

The company recently beat its 2014 prospectus estimates but emphasised at the time it was too early to expect outperformance again in 2015, given ad market visibility is limited to a few months. Still, UBS notes 2015 trading has been positive so far, although the December quarter remains the largest and most important trading quarter.

APN Outdoor has six primary advertising categories, including billboards, transit, rail, airports, street furniture and retail centres and was listed on ASX late last year.
 

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