oOh!Media screens as a cheap recovery story
Economic reopening and cyclical reflation trades have rewarded investors handsomely over the past six months or so, particularly those offering immediate leverage to the stronger than expected demand recovery scenario currently playing out. With many of these earlier-stage recovery companies now trading at or above pre-pandemic valuations, we have screened the small caps universe for tactical opportunities within the later-stage cohort which still offer earnings and valuation upside potential. A clear standout here is outdoor media company, oOh!media (ASX:OML).
Founded in 1989 and listed since 2014, OML (which has a $1 billion market capitalisation) commands a leading position within the Australian and New Zealand Out of Home advertising sector. The company reaches 77 per cent of the metropolitan and regional population via an extensive network of circa 37,000 digital and static asset locations spanning a diverse range of formats. These include roadside billboards, retail shopping centres, offices, bus stops, train stations and airports.
Historically, Outdoor has wrestled market share from ‘old world media’ like television and newspapers, largely driven by digital billboard conversions which deliver growing audiences and high investment returns to advertisers and media agencies.
Then along came the global pandemic…COVID-19 absolutely hammered the Out of Home sector, far worse than most other forms of media, with audiences significantly declining due to initial lockdowns and mobility restrictions. Advertisers pulled outdoor campaigns and redirected what was left of their budgets towards viewers stuck at home in front of the telly.
OML certainly was not immune to this dramatic shift, reporting an unprecedented 62 per cent decline in 2Q CY20 revenue compared to the prior year period with the company broadly holding market share. Faced with a rapidly evolving and highly uncertain near-term outlook, management took the decisive steps to materially reduce operating costs and strengthen the balance sheet (which was fully levered having funded numerous acquisitions and digital transformations). In late March 2020, OML raised $167 million in new equity to paydown debt and announced plans to save $45-65 million over FY20 (comprising $10-15 million fixed rent savings, $10-15 million opex savings and $25-35 million capex reductions). Management expects around $10 million of the opex saves to be permanent.
April 2020 turned out to be the low point for outdoor audiences with revenues recovering from June onwards (revenues typically lag audiences given advertisers react to data). At the May 2021 AGM, OML provided a trading update highlighting that 75 per cent of pre-pandemic group revenues comprising the key formats of Road, Retail, Street Furniture and New Zealand had largely recovered in 1Q 2021. Roadside billboards were a key callout, trading above 2019 levels. The remaining 25 per cent of revenues consist of the more affected formats of Fly, Office and Rail; in 1Q 2021 these were trading at just 36 per cent of pre-COVID19 levels.
So clear upside potential for the business exists as workers eventually return to offices and borders reopen to facilitate a travel sector recovery. We also see OML as well positioned to benefit from the strong domestic macro backdrop which should drive higher advertising rates across all formats as big advertisers like banks and auto come back into the outdoor market.
Consensus expectations are for OML’s earnings to recover to pre-pandemic levels in 2022 (c.$140 million EBITDA) which appears reasonable to us and potentially conservative should the economy prove stronger for longer and considering cost-out program. With the balance sheet in the best shape since listing (2022 ND/EBITDA 0.5x), the company has ample funding capacity to resume its digitisation program. OML’s four-year investment pipeline is currently worth $100-150 million (static-to-digital larger format screen conversions historically have seen a 3x revenue uplift).
Valuation looks too cheap to us. The stock is trading on 7.5x recovered EBITDA (2022) which compares to OML’s historic average of 10-12x and the broader small cap market on 11x. We see potential for the stock to rerate towards 10x as confidence in the earnings recovery builds.
Key risks to the story are the shape and pace of the recovery and contract renewals. Recent domestic outbreaks aren’t ideal, however successful vaccination programs in countries like the US and the UK provide confidence in the medium-term outlook.
On contracts, the Sydney Trains concession remains uncertain given the prolonged tender process. OML argues that it the company has bid what it believes is fair and points to the it’s high renewal rate and low customer concentration (no individual concession contributes more than 6 per cent of revenue). We believe uncertainty around the Sydney Trains contract has been weighing on the share price so it will be good to get an outcome, either way.
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Dominic is Portfolio Manager of the Montgomery Small Companies Fund – a small-cap Australian equity fund investing in 30 to 50 high quality, undervalued small and emerging companies with strong growth potential. The fund invests outside the ASX100.