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Morningstar | Holding Steady oOh media's Intrinsic Worth Amid Winds of Worry

Shares in oOh media are trading at a 23% discount to our AUD 4.95 fair value estimate, reflecting a number of concerns.

First, there was a slowdown in the advertising market to low-to-mid-single-digit percentages in the December-half of 2018. This has ignited hysterics regarding the potential impact on oOh media, a company whose largely fixed cost structure exacerbates the negative operating leverage from revenue headwinds. However, the outdoor advertising market is one category that is bucking the trend, likely up high-single digits in the recent December-half.

Second, worries about the advertising slowdown have extended to concession renewal risks, particularly elevated as they relate to the recently-acquired Adshel--a AUD 570 million bulk-up that oOh media paid 11.6 times EBITDA for. But one of Adshel's biggest concessions, the Brisbane City Council street furniture contract, was successfully retained recently for another 10 years from March 2019, albeit the cost of the renewal remains a mystery. In any case, concession renewal is a perennial risk for an outdoor advertising entity and is the very reason we have a no-moat rating on oOh media.

Third, the recent Australian Competition and Consumer Commission's, or ACCC's, inquiries into discount and rebate practices in the outdoor advertising industry have thrown a regulatory spanner in the works. We are reluctant to sway our intrinsic assessment for oOh!media on a development so vague as to render any analysis pointless. In fact, we are bemused by this left-field inquiry, coming just five months after the ACCC cleared the JCDecaux-APN Outdoor and the oOh!media-Adshel deals. We would have thought any concerns (especially from smaller players) about anti-competitive behaviour would have been raised and addressed during that process.

As such, we retain our AUD 4.95 fair value estimate on oOh!media, and see value in its shares at current levels. The group will release its annual result on Aug. 25, 2019.

Delving into the ACCC inquiry, we understand the regulator is corresponding with various outdoor operators, including oOh!media, with a view to assessing whether the rebate and discount practices in the industry fall foul of the competition laws. In a nutshell, rebates are effectively "kick-backs" or "discounts" given by an outdoor operator to an advertiser (or most likely the advertising agency who acts on behalf of the advertiser) for throwing certain amount of business the outdoor operator's way. The scene becomes murky when these rebates: (1) have the effect of preventing the advertiser/agency from doing business with the outdoor operator's competitors; and (2) do not flow back to the underlying paying advertiser, but stay with the agency which then becomes a competition gatekeeper.

We are not privy to the prevalence of these practices in the outdoor industry, or if they exist at all. From our viewpoint, however, such practices would be hard to distinguish from straight-out aggressive sales techniques. Indeed, this author has enjoyed many good discounts in his time for buying chattels and services in bulk. In doing so, no contractual promises were ever made NOT to buy similar chattels/services from other providers. However, the bulk-buying and discounts received naturally meant this author did less business with others. Then again, we would be the first to admit that this is a very crude example.

The ACCC will now review all the requested correspondences and information from the outdoor operators and, if warranted, escalate the inquiry to a more detailed investigation. This could then either fizzle into nothing or result in infringement notices for the relevant outdoor operators.

In the meantime, we are all in the dark. And so it also appears for oOh!media, its competitors and even the Outdoor Media Association which, we would have thought, should have at least acknowledged and responded to the ACCC inquiry, as the peak voice of the outdoor advertising industry.