Outdoor Advertising Continues To Eclipse TV

This story features OOH!MEDIA LIMITED, and other companies. For more info SHARE ANALYSIS: OML

Outdoor advertising is eclipsing TV these days and, with the digitising of billboards, companies in this sector are increasingly attracting broker scrutiny.

-Significant efficiency benefits in digital billboards
-Capital expenditure on digital may start to decline beyond 2017
-Brokers not overly concerned by slowing revenue growth trend
 

By Eva Brocklehurst

Outdoor advertising continues to take precedence over TV sets these days and with the digitising of billboards, those companies in this sector are increasingly arracting broker scrutiny.

Growth in the sector has recently been driven by digitisation. Digital revenues in Australian outdoor advertising increased rapidly to 40% of sector revenues in 2016 from just 8% in 2012. The current market generated $790m in net revenue in 2016. The main benefits of digital billboards are flexibility and yield enhancement, as these are able to serve multiple advertisers on the same screen.

Deutsche Bank initiates coverage on the sector with Buy ratings on APN Outdoor ((APN)), oOh!Media ((OML)) and QMS Media ((QMS)), believing pure outdoor stocks should re-rate from current levels, given the underlying sector growth.

The broker is of the view that the high level of urbanisation in Australia relative to the rest of the world provides for a penetration rate that is higher than the global average of 6% for billboards. Population growth, growth in air travel and continued increases in the number of kilometres that are travelled all support the medium.

Risks Priced In?

Deutsche Bank believes the risks to these outdoor stocks are effectively priced in at current levels and multiples do not take into account underlying sector growth. OOh!Media provides exposure to to a highly digitised portfolio and is the broker's top pick, with further scope to convert static billboards as only 54 of its 4,000 billboards were digitised at the end of 2016.

QMS has undertaken an aggressive expansion and increased its digital billboards to more than 68 as of June this year, from 12 just three years ago. APN Outdoor, which has the lowest proportion of digital revenues relative to the others, is still exposed to favourable dynamics and the recent sell-off represents an attractive entry point, and the broker's opinion.

Major players in the business are investing heavily in converting static panels into digital. Beyond this year, Deutsche Bank expects this capital expenditure will decline, amid forecasts for the number of digital screens being added to the system to progressively decline. This should in turn support free cash flow over the medium term.

HT&E ((HT1)), while not a pure player in outdoor media as it has a radio segment, has also shown significant improvement in its outdoor division. The company has a strong presence in street furniture, taxis and bus/tram advertising via its Adshel business. Adshel's performance improved significantly in March and forward bookings remains solid, Credit Suisse observes, and the rate of digitisation is expected to increase in Australia.

Now the merger between APN Outdoor and oOh!Media will not go ahead, the company should be a beneficiary in the broker's opinion, as that former deal had potential to erode Adshel's market position.

Deutsche Bank calculates that Adshel has around 16% market share and APN Outdoor and oOh!Media represent around 64% of the industry. APN Outdoor, oOh!Media and QMS are the main competitors in billboards, whereas the former two are also the main operators in airports. In New Zealand, QMS is the largest operator with around 39% market share.

Slowing Growth?

Brokers acknowledge that in the year-to-date advertising revenue growth in outdoor media has slowed to around 7% year-on-year, mainly driven by flat revenue in "roadside other" (street furniture, taxis/bus/tram) and transport (train stations, interchanges, airports) segments. UBS acknowledges the data suggests slower digital yield growth in recent months versus history, but points out the outdoor advertising market is predominantly weighted to the September and December quarters.

The trend should be monitored but Deutsche Bank is not overly concerned, as billboards and the retail/lifestyle segments have continued to grow in double digits and both oOh!Media and QMS derive over 70% of their revenues from these areas. The broker concedes APN Outdoor has a relatively high level of exposure to the weaker segments such as roadside other and transport, yet expectations for growth still reflect the trend.

Importantly, outdoor advertising over the decade to 2016 has been one of the few traditional advertising segments to gain market share. The outdoor industry grew at a 7.6% compound growth rate versus the Australian advertising industry at 5%. UBS notes digital, as a proportion of total outdoor revenue, was 44.7% in May versus 36.8% a year earlier, implying digital revenue growth of 33% and a -4% decline in static revenue.

See also, Outdoor Media Growth Robust, But Slowing on June 6, 2017.
 

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