-Positive trends seen for 2-3 years
-Upgrades to APO, OML outlook
-What if retailers decide to in-source?
By Eva Brocklehurst
The growth in advertising outside the home – outdoor or out-of-home – has been exponential and brokers expect more to come in this regard. Credit Suisse describes the sector as a rare structural growth story inside a sluggish domestic economy. The process of digitising billboards has several more years to run and provides an additional tailwind for the sector.
Audiences are growing and inventory is being significantly improved in terms of presentation. Meanwhile, traditional media is being fragmented with advertising dollars seeking out destinations more likely to capture attention. Credit Suisse estimates advertising spending in the outdoor category now carves out 5.6% of the total advertising pie.
Morgans expects positive trends will continue for at least 2-3 years and the strength in demand across the industry will enable around 7.0% like-for-like yield growth. The broker upgrades forecasts for APN Outdoor ((APO)) following a very strong March quarter. Industry-wide revenue growth was 18.2%, and for the three segments in which APN Outdoor participates, first quarter growth was 16.9%, driven by the uptake of digital.
APN Outdoor is the largest player in the domestic market with a 30% market share. Its key areas are billboards and rail/transit advertising. Morgans upgrades FY16 and FY17 earnings forecasts by 11.1% and 12.3% respectively.
Credit Suisse finds a number of aspects of the stock are attractive, including a broad roadside inventory in metropolitan areas, which supports a sustained roll out of digital billboards at high conversion multiples. The company's 83% market share in transit also provides advertisers with exposure to higher domestic passenger movements.
Credit Suisse estimates growth in roadside billboards accounts for over 60% of company-wide growth forecasts of 10.5%. The broker initiates coverage with an Outperform rating and $7.05 target. While the stock's valuation may appear to be a stretch to some, it still looks appealing against industry peers both domestically and offshore, the broker contends.
While the company has not disclosed its lease maturity profile to any extent, commentary suggests 2016 represents a low point in the re-leasing cycle with a step up in expiries from late 2017. Nevertheless, the majority of the company's lease relationships have been in place for at least 10 years and Credit Suisse suggests this, plus the form of media, represents a barrier to entry.
Potential near-term catalysts, in Morgans' view, include a further strengthening of demand for outdoor advertising, a successful roll-out of new digital spaces and accretive acquisitions. Risks for APN Outdoor centre on a sudden drop in overall consumer demand, a slowing in the rate of digital roll-out and acquisitions that stretch the balance sheet.
APN Outdoor has four Buy ratings on FNArena's database with UBS retaining the one Neutral rating. UBS believes that despite beating estimates in 2015, the stock is fairly valued. The consensus target on the database is $6.77, suggesting 0.6% upside to the last share price. Targets range from $6.00 (UBS) to $7.24 (Morgans).
oOh!media ((OML)) is the second largest player, with 29% overall market share but a more substantial presence in its key markets of billboards (36%) and retail precincts (62%). Credit Suisse forecasts an additional 15 digital roadside screens in FY16, taking the company's inventory to 40, with 15 per annum thereafter.
Given the amount of self help that is driving revenue momentum the broker has a high degree of confidence in forecasts for a two-year earnings compound growth rate of 14%. Credit Suisse believes forecast risks are skewed to the upside, modelling 6-8% revenue growth beyond 2016.
Moreover, the benefits of the company's data strategy are considered to be overlooked by the market, should its efforts in this area gain traction. This may be the driver of the next leg of growth in the sector. The data potentially provides advertisers with information on who they are reaching, over and above mere numbers. At present this capability is limited to select retail inventory operated by oOh!media but if rolled out into broader categories could drive further advertising dollars.
In the case of upcoming lease expiries, Credit Suisse suspects 2015-16 is a relatively quiet period. The company's commentary at the FY15 result release signalled work has been done to improve the lease profile, with 73% of road revenue and 64% of retail revenue having maturities beyond FY18.
Credit Suisse considers the stock at an attractive entry point and the discount to peers excessive, despite some reservations such as the exposure to retail in-sourcing and relatively higher gearing and regional presence. The broker initiates with an Outperform rating and $4.95 target.
The FNArena database has two Buy ratings for oOh!media with Macquarie retaining a Neutral rating. The broker believes that with the stock trading near its target, earnings upgrades will be needed to drive share price upside. The consensus target is $4.62, suggesting 1.4% downside to the last share price. Targets range from $3.80 (Macquarie) to $5.10 (Ord Minnett).
One area of concern has become more pronounced since Westfield ((WFD)) decided to in-source the operations of the panel inventory in its shopping centres, previously administered by oOh!media. Westfield, being a global business, has significant inventory and a close relationship with a large number of retailers as well as its own dedicated marketing team.
Credit Suisse believes this is the important distinction when assessing asset owner ability to in-source. In the case of roadside billboards the ownership is highly fragmented while the state-run transport departments would have challenges internalising this function.
Elsewhere, retail/office are the most likely to internalise and, in this instance, oOh!media is the most exposed with 40% of FY16 revenue expected to emanate from retail and its InLink businesses. Again, on the positive side, the InLink business has a substantial amount of revenue tied up in long-term contracts.
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