According to the top analysts, Ooh!Media (ASX:OML) is nearly 30% undervalued. However, we believe that it could still get even cheaper.
We recently revisited Ooh!Media in order to assess the Company’s performance and outlook including the recently-acquired Adshel business. This has now positioned OML as the leader in the Australian and NZ outdoor advertising market, with the Company now accounting for around 47% of total industry revenues.
The key areas of focus for investors ahead of the Company’s full year result (OML has a 31 December balance date) was on the Company’s earnings guidance and the progress on reducing the level of gearing. This was given that the balance sheet is considered over-geared, as a result of the Adshel acquisition, which was partly-funded by additional debt. Indeed, the gearing level (2.6x) remains elevated, but is still expected to fall based on Company comments at the time of the Adshel acquisition that gearing should reduce to under 2.0x within ~18 months from completion of the acquisition.
Organic Earnings Growth Proving Elusive
Most of the earnings increase (on an EBITDA basis) for FY18 was driven by the inclusion of the Adshel acquisition. By way of background, Adshel’s primary assets are Street Furniture/Rail sites, with 21,000+ poster faces and 800+ digital screens across Australia and NZ. Adshel primarily operates in the street furniture and small-format billboard segments and has a national presence across Australia and NZ.
The organic EBITDA performance in FY18 (i.e. excluding Adshel) was only +4.6% and at the bottom end of guidance, with organic EBITDA growth in 2H18 flat despite revenue growth of ~8%.
Earnings guidance for FY19 is considered disappoint from a number of viewpoints:
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i. A contraction in gross profit margin growth is limiting gross profit growth to low-to-middle single digit growth, which is below industry revenue growth assumptions.
One of our previous reservations about OML (i.e. prior to the Adshel acquisition) is that the expansion in the number of digital advertising panels, while leading to gross profit margin expansion, is not filtering through as an expansion in EBITDA margin, as the Company is investing some of the incremental gross profit margin gains into sales, marketing and technology capabilities in order to maintain market share and support further digital conversion. This was evident in FY18, with EBITDA growth of 14.9% below revenue growth of 26.9%.
ii. The higher-than-expected cost growth reported in FY18 is expected to continue. For FY18, operating expenditure growth (excluding Adshel) of 18% offset revenue growth of 9.6%. For FY19, OML provided operating expenditure growth guidance of 5-7% (which was also higher than expected) and includes the phasing-in of additional costs/headcount across FY18, with a key factor behind the continued growth in operating expenditure being needed to undertake continued spending on necessary areas such as technology and digital sales.
Fundamental View of Ooh!Media
While we remain positive on the industry that OML operates in, with the Company (as market leader) benefits from market structuring and increased penetration of the out-of-home (OOH) category, we maintain our cautious stance on the fundamentals, given that gross profit margin is expected to remain under pressure.
Advertising markets (and therefore revenue performance) are hard to predict, with the Company cautious on the June quarter in particular given the close proximity of the NSW and Federal Elections (as well as the timing of Easter/school holidays).
Further, the current consumer spending cycle is becoming more conservative. As outdoor advertising companies are highly leveraged to economic activity and advertising spending, continuing weakness in key macro indicators (in particular discretionary retailing, housing and new vehicle sales) may impact the earnings growth profile in FY20, given that OML has a high fixed-cost base (underpinned by long-term site leases) but have very short-term revenues with site bookings made typically no more than 30-60 days prior to placement.
Since the start of the year OML’s chart has been dominated by the large drop at the end of February. It clawed its way back towards those levels once more but has once again found some resistance. With the stock comprehensively rejecting those resistance levels again, the risk for OML is to the downside.
Michael Gable is managing director of Fairmont Equities.
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