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Morningstar | oOh Media Oozes Confidence as It Invests Ahead of Curve

The 11.5% lift in oOh media's fiscal 2018 first-half underlying EBITDA to AUD 37.9 million was broadly in line with our expectations, as was the 1.5% drop in normalised net profit to AUD 16.1 million. However, the quality of the result was noteworthy, with a stellar 16.4% jump in revenue from the key roadside billboard category (38.7% of group revenue) and AUD 14.6 million in free cash flow the highlights. In fact, the 119% EBITDA/cash flow conversion was the highest ever recorded for the June half, partly contributing to net debt/EBITDA deleveraging to 1.3 times, down from 1.4 times six months ago.

Even the maintenance of the 19.7% EBITDA margin from a year ago was commendable. Management could have easily succumbed to the temptation of banking the 11.0% group revenue growth to the bottom line. However, its unwavering commitment to investing for future earnings sustainability is encouraging, with operating costs jumping 20% to AUD 49.7 million. That commitment, anchored on a strategic desire to step-up oOh media's systems and capability (especially in data and sales), is all geared towards transforming the group to a more flexible and data-driven outdoor entity--one that can meet the demands of advertisers struggling to reach audience in an ever-fragmenting media landscape.

As such, we are comfortable with management's decision to maintain fiscal 2018 full-year underlying EBITDA guidance at AUD 94 to 99 million. This is in line with our AUD 97.3 million estimate, with our outer-year forecasts also largely intact. Shares in no-moat-rated oOh media are trading 4% below our unchanged AUD 4.95 fair value estimate, one that already incorporates the Adshel acquisition and the recently-completed equity raising to fund it. We believe the acquisition will obtain the greenlight from the competition regulator whose views are likely being enlightened by the current digital inquiry showing the challenges facing traditional media from proliferating digital onslaught.

Fiscal 2018 first-half normalised net profit after tax but before amortisation of acquired intangibles, or NPATA, fell 1.5% to AUD 16.1 million. This was lower than 11.5% growth at the underlying EBITDA level due to a 22.4% jump in depreciation, mainly due to elevated capital expenditures over the past 18 months for inventory digitisation, as well as higher interest costs.

The company declared an interim DPS of 0.035, fully franked. While this was down from AUD 0.045 a year ago, it merely reflects the need to satisfy the additional 74 million new shares that were issued in June/July, with the total dividend quantum still up 12.1% year on year to AUD 8.3 million. It is also because of this capital raising that oOh media's current balance sheet is debt-free, with the AUD 125.1 million net debt as at the end of June 2018 now more than offset by the AUD 330 million equity subsequently raised in June/July.

Divisionally, the only lowlight in the first-half result was the 5% decline in revenue to AUD 53.6 million from the retail category--one that unexpectedly suffered from increased competition in shopping centres. This is an area to keep a close eye on, as the division accounts for 27.9% of group revenue. The importance is such that management has already implemented changes to respond to the competitive dynamics, with forward bookings showing growth in the current second half to-date. We currently forecast the division to finish fiscal 2018 with revenue growth of 1.0% before reverting to high-single-digit percentage growth thereafter.

All the other divisions posted strong top-line growth, with roadside billboard revenue up 16.4% to AUD 74.4 million, Fly (airport terminals and lounges) up 18.4% to AUD 29.3 million, and Locate (cafes, pubs, office buildings) revenue up 30.8% to AUD 20.8 million. Even in New Zealand, where the overall outdoor advertising market was largely flat, oOh media recorded a 19.3% rise in revenue to AUD 9.2 million. We forecast roadside billboard revenue to lift 14.0% for the full year, before slowing to around 7% thereafter, while we expect Fly revenue to jump 15.0% for the full year, before sustaining mid-single-digit percentage growth thereafter. As for Locate, we expect 25% growth for 2018 before slowing to high-single-digit growth thereafter.

As for the Adshel acquisition, management was silent on the progress of the Australian Competition and Consumer Commission, or ACCC, approval process. In the meantime, Adshel's recently-reported result shows the impact of the Yarra Trams concession loss, with its first-half EBITDA down 7.2% to AUD 20.6 million, albeit slightly less than originally feared. We maintain our preliminary view for Adshel's pro forma EBITDA to be AUD 48.8 million in fiscal 2018 (boosted by full-year effects of recent contract wins), with the acquisition to be completed before the end of the year.