EUR 850.00 For Business Accounts Only

Morningstar | OOh media Spends Indoors to Expand Outdoors

The revenue outlook for oOh media is solid. Having matched the outdoor advertising market with a 10% organic sales increase in 2018, the group's top line is still growing at 9% in 2019 to-date. The current election cycle (State done, Federal forthcoming) will inject some uncertainties near term. However, long-tailed structural tailwinds for the outdoor medium are intact. Outdoor audience was up another 2.2% last year, the eighth consecutive year of growth versus drifting eyeballs in other traditional media. Inventory digitisation also continues to lure advertisers, with overall industry now 52% digitised and oOh media even more advanced at 60%.

As such, it is not revenue keeping shares in oOh media 17% below our AUD 4.60 fair value estimate. It is costs. We expect underlying operating expense (including cost of media sales and production, but excluding Adshel costs) to grow another 8% in 2019, after an 11% increase in 2018. Much of this investment is proactive, bulking up staff, technology and marketing to better monetise outdoor's potential and fortify oOh media's long-term revenue growth profile whose five-year CAGR we forecast at 12%.

The recent costly renewal of the Brisbane City Council concession is adding to the cost concern. Indeed, the rental increase could neutralise much of the synergy forecast to be extracted from the Adshel integration in 2019. However, concession renewal is a perennial risk facing all outdoor operators and is why we have a no-moat rating on oOh media. With a much-consolidated industry structure (five major players cut to three over the past year), cost pressures on future renewals may also ease.

It is for these reasons we retain our positive view on oOh media shares at current levels. While near-term cost pressures will cap pro forma EBITDA growth at 7% in 2019, our five-year CAGR is 16%. This growth outlook is not reflected in the 7.0 times enterprise value/EBITDA that the stock is trading at on our 2020 forecast.

Much of the current investment is designed to future-proof the business and guard against the inevitable complexity that will arise from increasing demand for digital inventory. It will make oOh media's business more scalable and is a key factor in driving our forecast EBITDA margin increase to 28.4% in five years' time, from 23.2% in 2018. Some of the cost increase is also to improve the group's data capability in order to strengthen the effectiveness and accountability of its outdoor offerings, especially on the digital side.

And the growth in digital has been strong. At the overall outdoor industry level, percentage of advertising revenue from digitised inventory has increased to 52% in 2018 from 11% in 2013. OOh media has outpaced the market, with digital revenue lifting to 60% in 2018 from 19% in 2013. The importance of this trend cannot be understated. Converting a traditional outdoor advertising site to a digital one is attractive to marketers as it allows creative flexibility (change messages during a campaign), immediacy (short lead-time) and premium presentation. Digital conversion also benefits the outdoor advertising operator as it attracts new clients, allows greater inventory utilisation and offers yield management flexibility (different rates for different parts of the day). We estimate converting a static site to a digital site can lift advertising revenue three- to four-fold, potentially doubling the margin.

Finally, it was Measurement of Outdoor Visibility and Exposure, or MOVE, that recently released research showing outdoor audience increased 2.2% in 2018, now reaching 12.7 million Australians every day. Prior to 2010, a key Achilles heel for the outdoor advertising industry was the lack of reliable audience measurement. However, with the 2010 launch of MOVE, the medium now has greater legitimacy and offers a more robust way for marketers to assess the audience numbers. While the 2.2% increase in 2018 outdoor audience may not seem much, it was the eighth consecutive year of growth and is certainly more positive than falling audience numbers for traditional media such as free-to-air TV and newspapers.