On the surface, oOh!Media’s (ASX:OML) results for the six months to 30 June 2021 (1H21) and outlook commentary suggested that the Company is well leveraged a domestic economic & business recovery once current restrictions ease.
However, the extent to which OML can capitalise on an eventual recovery in market conditions is also dependent on several Company-specific factors. Accordingly, we assess the extent to which the re-rating in the shares can continue.
oOh!media (OML) operates in the Australian and NZ out-of-home advertising industries and has the leading market share in each of its operating segments in Australia and NZ. The Company, which has a 31 December balance date, has an extensive network of more than 37,000 digital and static asset locations includes roadsides, retail centres, airports, train stations, bus stops, office buildings, cafes, bars and universities. The operating segments comprise:
• Commute, which consists of the Company’s street furniture and rail assets.
• Road, comprising metropolitan and regional roadside billboards.
• Retail, comprising shopping centres, with a significant exposure to Tier 1 retail shopping centres.
• Fly – OML’s airport assets are weighted more towards domestic travel.
• Locate – including cafes, pubs, universities, and indoor social sports centres.
Key Fundamental Drivers
Direct Correlation to Economic Recovery
At the 1H21 results release, OML noted that, relative to pre-COVID-19 levels, 75% of the business had recovered, with notable strength in Road (large format billboards) and NZ, both of which were above 2019 levels. The remaining 25% of the business was lagging (i.e. airports, offices, and railway stations) due to low audiences, suggesting that the latter group will benefit as lockdowns cease.
The Out of Home (OOH) market is prone to short-term market shifts & disruptions due to COVID-19 lockdowns. However, the potential for strong revenue growth when audiences recover (i.e. as restrictions ease in response to rising vaccination rates) means that advertisers are quick to return once lockdowns are eased or lifted. To this end, it is worth noting that overseas OOH markets have recovered quickly through improved audiences driven by vaccination rates and restrictions easing.
Advertisers appear to be primarily looking to defer spend and are paying higher rates. These benefits are likely to take effect in 1Q22, given that lockdowns for Sydney & Melbourne (both of which are major markets for OML) are likely to continue into 4Q21.
Operating Leverage Expected to Continue
Despite operating costs (mainly staff costs) returning to 2H19 levels, the 1H21 results showed evidence of operating leverage. The continuing recovery in OOH audiences delivered a 23% increase in revenue to $251.6m, with the strong revenue uplift translating to underlying EBITDA more than tripling to $33.3m. Earnings were further supported by ongoing cost discipline and negotiated fixed rent abatement with commercial partners.
Positively, OML indicated headcount is expected to remain flat into FY21 which means the group should benefit from positive operating leverage when revenues recover in FY22/23, as an estimated ~70% of OML’s cost base is fixed (comprising mainly of rent and staff costs).
Balance Sheet Continues to Strengthen
Stronger operating cashflow enabled the Company to pay down debt over the course of 1H21, which led to a decline in gearing (on a net debt to EBITDA basis) declined from 1.8x to 1.1x. The current gearing level is lower than that of recent years, where gearing was elevated as a result of the acquisition of Adshel, which was partly funded by additional debt of $260m. A subsequent equity raising allowed the Company to reduce lower debt levels on the balance sheet. The gearing level is expected to fall further in FY21 and FY22, as:
i. The level of free cashflow is supported by only a moderate increase expected in capital expenditure and
ii. Dividend payments are expected to a return in 1H22, after dividends were suspended in 1H20.
Well Positioned to Participate in Merger & Acquisition Activity
The strengthened balance sheet position also provides increasing scope for OML to participate in industry consolidation, given the already-fragmented nature of the industry, the attractiveness of the OOH medium with all types of media and the likelihood that the operations/financials of smaller competitors have been strained during the current lockdowns.
Contract Renewal Risk is Minimal
A potential catalyst for the shares is the renewal of the Sydney Trains contract, which was recently extended until the end of FY21. This contract is significant in terms of its earnings contribution, representing ~6%. Contract renewal risk in FY22 is at record lows (at ~5%), with no single contract accounting for >6% of group revenue. It is worth noting that FY22 and FY23 are quite low years with respect to contracts up for renewals, which typically is a key focus for investors. Further, average contracts are long-term in nature (~5-6 years).
The shares are currently trading on a 1-year forward P/E multiple of ~28x, which does not appear demanding in the context of expectations of EPS growth of ~90% over FY21-23 on a CAGR basis, with the market factoring in a substantial impact to earnings in FY21 from the current lockdowns.
Given that the 1H21 result demonstrated that OOH recovers quickly when lockdowns are eased/lifted, the key issue for OML is the extent of the recovery, rather than the timing of the recovery. Regarding the latter, OML is now likely to regain FY19 revenue in FY23, which is in line with recently updated industry forecasts for OOH revenue to return to pre-COVID-19 levels in late calendar year 2023.
Upside to current earnings estimates include a faster-than-expected recovery in key formats, as well as further rent reductions beyond FY20 as sites and negotiations come up for renewal.
Since the end of last year, OML has been trading in a noticeable range between about $1.50 and $1.90. In the last several days, it has bounced off the bottom of the range and is heading back up to retest resistance. Volume has also been healthy on the way up. The shares are a bit too close to resistance to risk buying at current levels, however, a break above resistance would be a buy signal. Because OML has been trading in a range for so long, any break above resistance near $1.90 could lead to a significant rally higher.
Michael Gable is managing director of Fairmont Equities.
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