Australia | May 29 2018
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Conditions in the outdoor advertising sector have improved substantially in 2018 and APN Outdoor has upgraded its guidance.
-New revenue streams replacing the lost Yarra Trams contract
-New operating model delivering benefits quicker than previously expected
-Bid for Adshel may require capital raising
By Eva Brocklehurst
Earnings momentum gathered pace for APN Outdoor ((APO)) over the first five months of 2018. The company upgrades its guidance, indicating revenue growth to date is in the range of mid-single digits versus previous guidance for a flat outcome. The outdoor advertising sector has improved substantially, Morgans notes, in stark contrast to late 2017. Canaccord Genuity estimates this is the first meaningful upgrade to the company's full year guidance since February 2016.
APN Outdoor had previously guided for flat revenue because of the loss of the $15m Yarra Trams contract last year. UBS considers FY18 no longer a transition year as the company has signalled new revenue streams have replaced the drag from the loss of Yarra Trams.
The company provided 2018 operating earnings (EBITDA) guidance of $92-96m. Capital expenditure guidance is unchanged a $25-30m and there are plans to commission 20-25 digital billboards throughout the year. The fact capital expenditure plans are unchanged signals to Morgan Stanley that the extra revenue is not being driven by a larger new digital roll-out.
The broker attributes the growth to a stronger industry and APN Outdoor regaining revenue share, encouraged by the start to the year in a business that usually has revenue and earnings heavily skewed to the second half.
Guidance is a reflection of market growth and recovery of some share that was lost through 2017 so CLSA believes the new operating model is delivering benefits to the bottom line quicker than previously anticipated. The broker, not one of the eight monitored daily on the FNArena database, retains an Outperform rating and raises the target to $6.30 from $4.90.
Canaccord Genuity, also not one of the eight, believes there is potential for upside to the revised guidance and margin expectations, although notes the company will be cycling a soft second half. While tempted to take more positive view, this broker is cautious because of the potential for a capital raising, so a Hold rating is maintained and the target is $5.50.
The upgrade is timely, Citi agrees, although remains surprised at the material improvement in trading conditions, given the company provided an update just five weeks ago at the AGM. The broker's estimates increase by 8% on account of the update.
Citi does speculate whether the company is deferring cost increases. APN Outdoor had flagged its under-investment relative to competitors, and a one-off reset of the overheads cost base in 2018.
Depending on the outcome for 2018 revenue and operating earnings the broker envisages margins could be expanding and this would be quite surprising given the stated need to re-invest. Citi suspects the cost base will need more than a one-off increase, particularly when compared with how competitors are faring.
Demand for digital outdoor advertising is likely to continue to grow at single digit rates for the next three years, Morgans suggests, and, barring unforeseen economic events or management errors, the company should deliver steady earnings growth. As the stock is trading close to its revised valuation, Morgans maintains a Hold rating.
Credit Suisse is pleased earnings momentum has materialised, citing strengthening industry conditions, better roadside yields and better execution as the drivers. Taking on board the fact that the business is also absorbing a -$3m headwind as the company invests to bolster sales and internal infrastructure, the broker considers this trading update is very strong.
The company has a $500m offer for Adshel ((HT1)) on the table. UBS suspects HT&E may prefer a cash bid. If that is the case, and assuming APN Outdoor wishes to maintain its net debt to earnings ratio below 2.0x, an additional capital injection may be required to pursue the acquisition.
The broker notes near-term synergies have not been disclosed, while the strategic synergies for the longer term include building scale for tenders and bargaining power with landlords.
Credit Suisse expects the potential for a deal is likely to weigh on the stock in the near term and, should the transaction proceed, envisages a sizeable equity raising. While it does act as an overhang on the stock for the near term, the broker estimates that cost synergies could mean the deal delivers net accretion of 5-6% to APN Outdoor shareholders.
Canaccord Genuity estimates the company would need to reduce the operating expenditure base of the combined business by -$7m to neutralise the dilution to earnings per share. The broker also calculates an equity raising of around $250m will be required to part fund the acquisition.
Citi is concerned that competitive tension may push the price of Adshel above fair value, given APN Outdoor is competing with oOh!media ((OML)) for the business. The broker calculates that assuming a 60/40 equity/debt funding split, net debt would rise to around 2x and require a $300m capital raising. Still the consolidation potential is positive, which could mean margins improve across the industry.
The database shows three Buy ratings, two Hold and one Sell (Citi). The consensus target is $5.58, suggesting -1.3% downside to the last share price.
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