Australia | Oct 04 2017
This story features HT&E LIMITED. For more info SHARE ANALYSIS: HT1
Yarra Trams has ditched APN Outdoor and HT&E, continuing the merry-go-round of outdoor advertising contracts.
-Future earnings may have been eroded anyway as part of the renewal process
-Yarra Trams loss somewhat offset by Metro Trains Melbourne contracts
-Positive trends continue for outdoor advertising
By Eva Brocklehurst
Amid heightened activity in outdoor advertising contracts this year, mandate losses were always a risk. APN Outdoor ((APO)) and Here, There & Everywhere ((HT1)) have missed out on renewing contracts for Yarra Trams. The impact on each varies. The contract was held by HT&E's Adshel for street furniture and APN Outdoor for transit advertising.
Yarra Trams has decided to bundle tram-stop or street furniture and tram siding contracts, which suggests to brokers that JCDecaux has been the winner as, while this has not been disclosed, it is the only other operator than can provide a combined contract. Morgans suspects JCDecaux probably was prepared to accept razor-thin margins.
Brokers downgrade forecasts to reflect the lost contract. Canaccord Genuity suggests the market may be surprised about the -$22m combined benefit that the two companies were accruing from the concessions and wonders, given the likely competitive nature of the tender, whether those earnings would have been eroded anyway as part of the renewal process.
Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, makes no changes to 2017 forecasts for APN Outdoor, as the Yarra Trams contract is scheduled to run for most of the rest of the year. 2018 revenue and earnings are expected to be flat year-on-year.
Digital revenues are also likely to overtake static revenues earlier than previously expected, in FY19 as opposed to FY20. The broker has a Hold rating and $4.70 target.
UBS previously downgraded APN Outdoor to Neutral on the re-contracting concerns and regarding increasingly questionable yields on digital. Even factoring in minimal margin expansion the broker now considers the stock inexpensive and upgrades to Buy. The next leg of potential upside for the industry UBS believes hinges on the yield/monetisation of data and insights, as volume and digitisation tailwinds ease.
Credit Suisse downgrades forecasts by -9% for 2018 and 2019, assuming the impact from Yarra Trams in line with company guidance and no real relief from depreciation & amortisation. The broker factors in no flow-on impact on the remaining company inventory, but suggests it might have been easier to market adjacent inventory when packaged with highly sought-after properties such as Yarra Trams.
The contract for APN Outdoor, with advertising rights for the trams held over 10 years, contributed $7m to operating earnings but, separately, the company has retained preferred partner status for Metro Trains Melbourne, with rights to roadside and cross-track signage. This is a smaller contract, admittedly, versus the Yarra Trams.
Adshel has also been appointed preferred partner on a new seven-year contract with MTM, winning the deal from incumbent JCDecaux and, as this is a new contract, it will provide some offset to the Yarra Trams loss.
Yet, HT&E has guided to a loss of -$15m that is greater than brokers estimated from the Yarra Trams contract, suggesting a loss of network revenues and “halo” effect. The company has held the Yarra Trams contract for the past six years, having won it from JCDecaux in 2011.
Canaccord Genuity had expected very solid growth from Adshel in FY18 but now re-bases expectations, forecasting a -4.5% decline in operating earnings. Sharp earnings downgrades are not often a signal to buy a stock, the broker acknowledges, but, with the Yarra Trams contract being a key milestone and having passed, there may be a reappraisal. A Buy rating and $2.10 target are retained.
While the impact on Adshel is greater than expected it continues to have a significant presence in Sydney and Brisbane, Deutsche Bank observes, as well as the NZ market. Any further contract wins would present upside to the broker's forecasts.
Following this loss, Deutsche Bank observes Adshel will effectively have no CBD presence in Melbourne which explains the probable reduction in appeal for advertisers. Credit Suisse observes this is a significant item as Yarra Trams was the company's largest and most visible contract, agreeing that yields across the remainder of the network may be adversely affected by the loss of this premium Melbourne CBD inventory.
Providing some relief, much of Adshel's near-term capital expenditure plans were dedicated to the digitisation of Yarra Trams and the company has now lowered 2017 capital expenditure expectations by -$20m.
Credit Suisse observes the loss of the contract is the latest in a string of negative catalysts from the company that pre-date the corporate activity – acquiring Adshel and disposing of the print business – of the past two years. In hindsight, the broker considers the Adshel acquisition overpriced. Nevertheless, the stock appears compelling on valuation grounds and an Outperform rating is maintained.
APN Outdoor has four Buy ratings and one Hold (Credit Suisse) on the database. The consensus target is $5.29, suggesting 22.6% upside to the last share price. The dividend yield on 2017 and 2018 forecasts is 4.6% and 4.7% respectively.
HT&E has five Buy ratings. The consensus target is $2.78, suggesting 55.5% upside to the last share price this compares with $3.04 ahead of the announcement. The dividend yield on 2017 and 2018 forecasts is 5.2% and 4.1% respectively.
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