EUR 850.00 For Business Accounts Only

Morningstar | Tallying the Risks Amidst Rallying oOh media Shares. See Updated Analyst Note from 23 Jul 2019

Shares in oOh media are trading just 5% shy of our unchanged AUD 4.60 fair value estimate, having returned 30% since the start of 2019 inclusive of dividends. Rather than indulging in a diagnosis of why the stock price has lifted, we engage in an assessment of potential risks to our intrinsic assessment.

First, what is the risk of oOh media missing its 2019 EBITDA guidance of AUD 152 to 162 million? (We are at AUD 156 million) We see the probability as medium. While the outdoor market (up 5.5% in the first half of 2019) continues to outperform overall advertising excluding digital (down mid-single digits), uncertainties reign in the economy and advertiser sentiment is fragile. Synergies from Adshel integration and pulling back on the 5% to 7% cost growth target may help. But management is not the type to abandon necessary investments and sacrifice the group's future sustainable earnings for the sake of hitting near-term earnings numbers, if trading conditions sour markedly.

Second, what is the risk of no-moat-rated oOh media losing concessions or having to pay up to keep them? We see the probability as medium. Concession renewal is a perennial risk facing all outdoor operators. However, the recent costly renewal of the Brisbane City Council contract shows the competitive intensity for any key locations up for grabs, and there are concessions representing 30% of group revenue maturing this year and next. While we expect management to renew most of them, with any cost increases offset by revenue growth and improved efficiencies from recent investments, the downside threat warrants attention.

Third, what is the risk of outdoor medium losing its lustre in the face of proliferating advertising alternatives? We see the probability as low. Investment by industry players (led by oOh media) in digitisation, data, measurement and inventory utilisation is ramping up, augmenting outdoor's inherent strength as a mass audience platform in an everfragmenting world.

Outdoor has already grown to account for over 6% of the total advertising pie, up from 4% five years ago. But the industry is showing no sign of complacency. OOh media has been vocal about its three-pillar strategy to help grow the outdoor industry's advertising share, comprising data (to illustrate effectiveness), content (to improve appeal and integration with other media), and service (to make it easier for advertisers to use outdoor). JCDecaux (beefed up with the recently acquired APN Outdoor) also recently showed its intention to promote the industry and modernise its offerings, enhancing its data planning capabilities, large-format digital billboard solutions, pricing methodology and effectiveness evaluation metrics.

The industry body Outdoor Media Association is also playing its part. This is evidenced by the organisation's decision to invest AUD 1.3 million in a neuroscience study to measure the relationship between outdoor advertisements and consumers' subconscious memory. This is part of a AUD 10 million package to come up with tools to measure the effectiveness of outdoor advertising in general. All these efforts should ensure the medium further lifts its share of the advertising pie to more than 7% in five years' time.

The solid outdoor market outlook and oOh media's own growth initiatives underpin our five-year revenue CAGR forecast of 12% for the group. Coupled with benefits of contributions from Adshel, synergies realisation from Adshel and recent investments to improve efficiency and scalability, we forecast oOh!media delivers a five-year EBITDA CAGR of 15%. In terms of financial health, we forecast underlying net debt/EBITDA falls from an Adshel acquisition-fuelled 2.6 to a more comfortable 2.0 by the end of 2020, before further deleveraging to around 1.5 in five years' time, a level we see as optimal for the group.