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Morningstar | Cost Increases Partially Mar oOh media's Revenue Growth Appeal

We cut our fair value estimate on oOh media by 7% to AUD 4.60 per share.

Full-year 2018 organic EBITDA growth of just 5% to AUD 94 million (excluding Adshel contributions) fell shy of our 8% forecast, implying no year-on-year earnings growth in the second half. While we had anticipated investment into systems and capability (especially in data and sales), the 18% cost increase was still higher than expected. It suggests the investment phase to bring oOh media to a more digital and data-led outdoor advertising company is an extended one, with management flagging another 5% to 7% lift in cost for 2019.

The flat underlying earnings performance from the recently-acquired Adshel was more fathomable, with the AUD 51 million EBITDA (on a pro forma basis, full 12 months basis) in line with management's AUD 48 to 50 million projection at the time of the acquisition. However, the cost of the recent Brisbane City Council concession renewal is revealing itself, acting as another impediment to earnings growth this year.

These cost-related factors have largely driven a 7% to 8% reduction in our EBITDA forecasts for the next three years, leading to our intrinsic assessment downgrade. Our 2019 EBITDA forecast is now AUD 157 million, at the midpoint of management's AUD 152 to 162 million guidance range. Our forecast EBITDA lift from 2018's base of AUD 113 million is entirely sourced from Adshel's full 12-month estimated contribution AUD 48 million, down 6% from 2018, as the impact of the Brisbane City Council concession begins to show. It also assumes the AUD 9 million operating cost increase caps organic growth.

The investment case for no-moat-rated oOh media has changed from a structurally-driven revenue growth story, to a cost-growth one reflecting continuing reinvestment and rising concession renewal burden. However, we believe the risks are more than reflected in the 18% discount the stock is trading relative to our fair value estimate.

Investors should not lose sight of the fact oOh media's future revenue growth profile is still attractive. Outdoor is the only traditional media platform that recorded growth in 2018, to the tune of another 11% which was in line with the CAGR achieved over the past six years. The structural tailwinds from outdoor's increasing appeal to advertisers based on mass audience, inventory digitisation, and data-driven addressability underpin our five-year revenue CAGR of 12% for oOh media. This flows to our forecast five-year EPS CAGR of 15%, helped by benefits of the current reinvestment program and synergies from the Adshel acquisition (AUD 15 to 18 million over the next two years).

2019 reported net profit after tax, or NPAT, fell 4% to AUD 32 million, impacted by the impact of the Adshel acquisition on depreciation, amortisation and net interest expense lines. On an underlying EBITDA basis, including three months of Adshel contribution since acquisition, the result was up 25% to AUD 113 million. Excluding Adshel EBITDA of AUD 18 million, organic EBITDA was AUD 94 million, up just 5% from a year ago, and implying zero growth in the second half.

The culprit for the subdued organic result was certainly not revenue which increased by 10% to AUD 417 million. However, underlying costs jumped 18%, or AUD 15 million. AUD 10 million was of this increase from higher staff costs due to establishment of a client partnership team and creative staff. Technology-related costs increased a further AUD 2 million and marketing costs also lifted by the same amount.

The board declared a final full franked DPS of AUD 0.075, bringing the total for the year to AUD 0.11. This equates to a payout of 44% from underlying NPAT before amortisation of acquired intangibles, and is within the board policy of 40% to 60%. The group ended 2018 with net debt/underlying EBITDA of 2.6 (assuming Adshel earnings for full 12 months), up from 1.4 a year ago, reflecting the Adshel acquisition. Management projects the leverage to fall to below 2.0 by the end of 2020 which is in line with our current estimate, down from forecast 2.4 in 2019.