In late June, oOh!Media (ASX:OML) announced the acquisition of Adshel. We had researched the company before this announcement. Given the recent share price weakness, we quickly review the Company and determine whether the charts tell us that now is the time to buy.
Overview of oOh!Media
OML has a national portfolio of Out-of-Home (OOH) advertising spaces throughout Australia across four segments:
- Road – Large format roadside billboards;
- Retail – Sites located in retail precincts such as shopping centres and supermarkets,
- Fly – Sites in airport terminals and lounges; and
- Place (formerly ‘Locate by oOh!’) – Sites in high dwell time environments such as CBD office buildings, cafés, pubs, universities, gyms and sports centres.
A key industry-wide trend in recent years, and the key driver of earnings over the short-to-medium term, has been the conversion of large format static panels to digital. Outdoor advertising on digital screens may include still and/or moving images. They are typically positioned in high profile locations, both internally and externally. With these types, the ad can be ready within minutes.
In order to maintain a point of differentiation relative to other outdoor advertisers, and to continue to generate revenue growth above the rate of outdoor media advertising industry growth (which has slowed to mid-single digits over the last couple of years), OML as to maintain an elevated level of capital expenditure in order, the bulk of which is invested in new digital screens.
Acquisition of Adshel
In late June, OML announced the acquisition of Adshel for $570m via a combination of scrip and debt. This followed a failed bid by OML for Adshel in April 2018. By way of background, Adshel is an outdoor advertising business, owned by ASX-listed competitor HT&E (ASX:HT1). They are focused on street furniture, which includes advertising panels on bus/train/tram shelters. Adshel has leased around 24,000 static and digital faces across Australia and NZ. The rationale for the acquisition is that outdoor street furniture is a market that ML does not currently have any operations. It therefore makes it an attractive bolt-on acquisition option.
However, while the strategic rational makes sense, OML has paid a relatively full price for the asset. It equates to more than 20% above what was offered in April 2018. This therefore erodes the EPS accretion from the acquisition and materially lifting gearing levels in the process. It also leaves little balance sheet flexibility for the Company to undertake meaningful additional strategic capital investments in the near term.
Fundamental View of oOh!Media
The retreat in the share price since the announcement of the Adshel acquisition means that the shares are currently trading on a 1-year forward P/E multiple of ~17x. This remains slightly above the recent average of ~16x.
Aside from our reservations on the potential financial impact from the Adshel acquisition, we still take a cautious view on OML as the Company faces the challenge of maintaining margin. Across the industry participants, digital advertising, which now contributes ~60% of OML’s revenue and well above the industry average of ~47%, is becoming more widespread across key metro locations. As such, the expansion in the number of digital advertising panels is not filtering through as an expansion in EBITDA margin. This is despite it leading to gross profit margin expansion. OML investing some of the incremental gross margin gains into sales, marketing and technology capabilities in order to maintain market share and support further digital conversion.
Chart of oOh!Media
In early April, OML broke above strong resistance around $4.45 and rallied to over $5.20. It then eased back and since late June, it has been falling on strong volume. This means that for the short term, we are likely to see lower levels. That $4.45 zone will provide strong support. So if OML can test that level and bounce strongly, then we can be sure that the downwards slide is over. That would represent a buying opportunity from a charting perspective. Otherwise if it cannot hold that level, then we may be looking at levels back towards $4.
Michael Gable is managing director of Fairmont Equities.
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