This week two of our significant investments announced a merger of equals and both announced earnings upgrades. It was a nice Xmas present for UBS Small caps. To recap. We are long term believers in the outdoor media space for a variety of reasons. I outline the key reasons below.
- The sector is undergoing a digital revolution. The move to electronic everything (Roadside billboards, street furniture, café screens, railway media and elevator information) is cutting costs and simultaneously significantly lifting functionality. We believe that the sector is only scratching the surface in terms of what it will be able to offer and increasing the scope of customers in years ahead. A critical element of this will be the linking of all these devices to allow advertisers to run campaigns in real time. This should also allow an ongoing increase in market share which is currently around 5% of a $12bn market
- Feedback. As with digital advertising through Google and Facebook digital outdoor advertising offers advertisers direct feedback. We are already seeing systems put in place to monitor the impact of advertising placed on roadside screens via credit card payments in surrounding areas. It is much more difficult to measure the direct and immediate impact of tv advertising.
- Free to air TV advertising. This is still the largest category and is probably following newspaper classifieds and magazines toward a much lower share. Over the last 18 months, TV advertising has been declining in key categories at double-digit rates. In critical urban and under 30 categories tv is simply losing its impact. This category is still at least 5x the size of outdoor. A few % of this decline in the outdoor category will make a big impact.
- Network effect. This is the real benefit of this merger. The ability to put together wide-ranging real-time advertising strategies for clients should allow the merged APO/OML to charge a scope and scale premium. This should give the merged entity a stronger ability to compete with TV and to be able to be competitive in securing sites.
- We are long-term believers in the growth and structural change occurring in outdoor advertising. We believe in that context that this merger, which is subject to shareholder approval and a review by the ACCC is a significant positive step.
Written by Stephen Wood, Portfolio Manager, UBS Australia: (VIEW LINK)
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