Small Caps | Aug 25 2015
-Upgraded growth outlook
-Which suggests re-rating
-Margins set to widen
By Eva Brocklehurst
APN Outdoor ((APO)) beat prospectus forecasts in its first half results and lifted guidance substantially. The company's billboards are winning advertising revenue share from other forms of media as well as other outdoor operators.
The company is not going out on a limb just yet, emphasising the most important months of the year for advertising are ahead. Nevertheless, it has revised pro forma earnings forecasts for 2015 to an increase in the "mid teens" percentage above prospectus. Morgan Stanley calculates this to mean earnings of around $62m for 2015.
Morgan Stanley believes the results support the longer term positive investment thesis. While it is clear is investment in digital screens is delivering top line growth, it is also significant that traditional static billboard earnings remain in positive territory.
The future is all about winning ad market revenue from other media and increasing market share, Morgan Stanley maintains. The broker expects earnings margins and returns will rise substantially over the next 2-3 years.
All categories outperformed in the half. Billboard revenue was up 21%, rail up 72% and airport 69%. The first half also signals to Ord Minnett the company will exceed prospectus forecasts by a substantial margin. An interim dividend of 4.5c was declared.
Digital revenue was up 174.9% on the prior corresponding half. As of June 30, 2015, the company had 37 operational large format digital billboards and intends to have 51 by the end of the year. Ord Minnett notes the stock was inexplicably weak leading into the result and this could be the start of a more sustained re-rating.
The broker expects solid earnings growth to continue beyond 2015 because of the digitisation of static billboards and potential for improving yields. Ord Minnett, not one of the eight brokers monitored daily on FNArena's database, has upgraded the stock to Buy from Accumulate, with a target of $4.05.
UBS expects second half revenue growth will slow to 12.5% as Australian industry growth is also observed to be slowing. The broker expects modest 2016 earnings growth of 12%, given the company will cycle the uplift from the Sydney-Melbourne XTrack contract.
The stock remains inexpensive relative to the growth rates, UBS acknowledges. Risks centre on yield pressure emanating from an increase in inventory and competition from other players, as well as the risk of cyclical downturn in advertising spending. NZ revenue also outperformed UBS expectations, with revenue up 42%. The increase reflected contributions from the new Auckland airport.
It is this Auckland airport contribution, the increase in the number of XTrack billboards and the Sydney airport contract which suggest that double digit second half growth is inevitable regardless of the overall media market, Morgans maintains.
A relatively high level of fixed costs and recent contract wins enabled the company's operating margin to expand to 19.2% from 11.6%. The change in mix to digital signs also helped, the broker observes.
There are three Buy ratings on FNArena's database. The consensus target is $3.72, suggesting 9.4% upside to the last share price. This compares with $3.35 ahead of the results. Targets range from $3.52 (Morgan Stanley) to $4.04 (Morgans).
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