Description

Summary thesis

Ströer is the largest out-of-home advertising business in Germany, with an estimated 60% market share. It is a high-quality business with strong unit-level economics, significant barriers to supply, and multiple long-term demand drivers.  The shares are trading at a wide discount to fair value - on top of their March 2020 lows - due to a combination of: structural complexity, Covid-related volatility, lease accounting confusion, recession fears, and a stale/disproven bear raid. Management is on a path to simplify the business over the next two to three years, which should serve as a meaningful catalyst for the share price. They are well-aligned as 40%+ owners of the stock, while ValueAct is the largest outside shareholder with over 11%. Leverage is low (2x EV/EBITDA), and management laid out a five-year plan in October 2021 that is well ahead of the Street, and, in our view, implies a 4-5x return in the stock over the next four years.

Business overview

The company is organized into three divisions. The first two, OOH (out of home) and DDM (digital & dialog media) are complementary, enhancing the returns and moat of each other. The third division, called DaaS & E-Commerce, is composed of two non-core businesses that account for only 5% of the earnings but will be monetized for over 50% of the market cap in the coming years.

Out of Home Division (50% of revenues; 60% of EBITDAaL): Out of Home advertising is experiencing strong demand growth in most countries/jurisdictions as it takes share from print & broadcast advertising, building from a low base within a generally growing ad market overall. The German OOH market has several characteristics that make it one of the most attractive markets globally

• Wide moat + stable duopoly = higher-quality business
  • The core of Ströer’s OOH business is their owned/small lease billboard portfolio, where supply barriers (NIMBY, zoning, etc.) are high, and they have a dominant market share in many municipalities.
  • Their dominance of the owned/private landlord billboard market gives them the scale to be the lowest-cost bidder on larger OOH contracts; this has led to a friendly duopoly with JCDecaux in Germany.
  • Regulatory balkanization from the German federal system and “National Champion” status also enhance moat
  • Substantial investment in software & systems – developed with insight from their online advertising businesses (DDM segment) – allows them to offer a strong platform for programmatic ad buying
  • Cross-selling & bunding of their OOH offering with DDM offering enables them to offer more comprehensive solutions/campaigns to advertisers, deepening their relationships and increasing wallet share with key customers
• Ongoing digital conversion initiative is accelerating growth AND widening the moat:
  • Similar to peers in the US and elsewhere, Ströer has found excellent economics in billboard digitization: 4x revenue uplift; 20-30%+ IRRs; 2-3 year payback periods.
  • Digital penetration in Germany (by revenue) is just 17% (compared to >50% in the UK)
  • Ströer has taken a more nuanced strategy toward digitization than global peers:
    • mobile data enables them to narrowly define catchment areas within municipalities
    • this data enables them to sell space to local advertisers in a hyper-targeted fashion (much more so than local broadcast or print)
    • this is enables them to win a new, stickier group of customers, take share from broadcast/print, and charge higher ad rates
    • we see the fruits of this new strategy in the numbers, where revenue from local customers grew YoY in 2020 (to nearly 25% of OOH revenue)
    • digital screens enable them to sell programmatic advertising, integrated with their online advertising platform, leading to better inventory & revenue management
• They have not yet made their portfolio available to MNOs for hosting small cells, though their footprint makes them a top digital infrastructure partner for this critical 5G component

Digital and Dialogue Media Division (40% of revenues; 35% of EBITDAaL): this division is led by t-online (a leading German news & web portal) and related online advertising businesses; it also includes Ströer’s direct marketing operations.

• They initially bought t-online from Deutsche Telekom in 2015, along with several other smaller acquisitions, to better understand the threats and opportunities offered by online & programmatic advertising. These acquisitions were also viewed by management as a hedge, purchased at a time when the long-term outlook of their core OOH business was murkier. Ultimately this has led to the development of some ad tech and platforms that are shared across online and digital OOH, including a unified SSP (supply-side platform) for programmatic.
• There are real synergies with OOH: for example, Ströer fills unused slots in their digital billboards with content generated by their online businesses.  This increases engagement with the billboards (commuters reading the news headlines), making the ad slots more valuable. At the same time, the billboards give t-online (and other proprietary content) more visibility and brand awareness.
• The online advertising business provided a small hedge to OOH during the Covid-lockdown.
• While the core t-online portal is highly profitable, they have also incubated other web properties with significant engagement (e.g., millions of monthly uniques) that don’t yet contribute to the bottom line. These represent a source of growth in the years ahead.
• The direct marketing business (call center & door-to-door) is the product of a 2017 roll-up to create a German market leader. Strategically, direct marketing has increased Ströer’s wallet share with their largest customers, driving revenue synergies and customer stickiness.
• These businesses have been solid investments – generating ~€150mm of run rate EBITDA on €800mm in invested capital

DaaS & E-Commerce (10% of revenues; 5% of EBITDA): Ströer has two material, non-core assets that are growing rapidly, are highly valuable, and they will seek to monetize in the next 2-3 years. These “homeruns” arose from the dozen-plus small acquisitions that they made over the past decade as part of their initiative to learn more about the online advertising ecosystem.

• Asam Beauty is a digitally native cosmetics company that management thinks they can monetize in 1-2 years @ 20x EBITDA, which would generate EUR 400mn for their 51% stake
• Statista is a subscription business that aggregates various types of data for its paying subscribers (they call it DaaS = data-as-a-service).  It has high gross margins (70%), low churn (<10%), and is growing subscription revenues at a fast clip (25%+). Management has guided to a valuation of ~10x revenue, and they claim to have already rebuffed offers ranging from EUR 1.0bn - 1.8bn from major PE firms.

Key Markers of Quality:

• High ROIC – Ströer’s returns on incremental invested capital are in the high teens
• Resilient – revenue fell only 10% YoY in 2020 & AFFO fell ~20%.  This is impressive for a business that should be so severely affected by lockdowns & reduced mobility.  It is similar to US billboard market leader Lamar and vastly better than all other global OOH peers, which saw their EBITDAs fall by more than half and cash flows swung negative during the Covid lockdowns.

• Barriers to supply/competition – Ströer’s high and sustained market share reflects the challenges of competing in a duopoly market with complex federal, state and local regulation and zoning.
  • Ströer has only lost one significant municipal contract in the past decade (Düsseldorf in 2018), and it came back to them less than two years later after the winning bidder couldn’t make it work
• Long term demand growth – OOH has been gaining share in the German advertising market, but Germany still over-indexes to print and TV. As OOH becomes more integrated with online advertising, adding increased flexibility and measurability, the value proposition for advertisers grows, driving continued share shift.
• Management alignment & quality – CEO & co-founder Udo Mueller owns 22%, while the co-founding Ströer family owns just under 20%. They have been thoughtful and highly effective managers, growing cash flows at a high clip, while simultaneously enhancing the moat.
  • The nuanced digitization strategy they are implementing (outlined above) is clever, well-thought-out, and was tested in several smaller cities
  • The M&A strategy that they conducted in the mid-2010s (buy-to-learn digital advertising & related businesses) has been criticized, but we think the strategy was well-reasoned, and it was clearly well-executed: even including the failures, the returns have been phenomenal.
  • Mueller & co-CEO Christian Schmalzl are very comfortable talking through the business, with a great mastery of the details, and their thoughtfulness is evident
• Low Leverage - they have ~600mn euros of net debt, which is just 2x EBITDA and 3x trough EBITDA (rolling four quarters starting Q2 2020, which is a severe stress test on the business, given two quarters of hard lockdowns).
  • IFRS-16 lease accounting makes leverage appear artificially high
  • They refinanced some of their debt last week at a blended 1.5%
• ValueAct is a 10%+ shareholder, having added earlier in 2022 (at prices well above the current)

Reasons for undervaluation

• Obscured asset value – Asam and Statista are valuable, high-growth, non-core businesses that are not meaningful contributors to profitability: ~5% of EBITDA but nearly 50% of EV.  Additionally, several analysts are modeling substantial tax leakage when these assets are monetized, which is inconsistent with the German corporate tax code (corporate-level capital gains tax is de minimus)
• Covid impact – the OOH industry was directly impacted by covid-related restrictions on daily life and business. The German economy is late in emerging from COVID
• Liquidity – liquidity is a modest EUR 5mn/day, as half the shares are closely held
• IFRS 16 – newly implemented lease accounting policies overstate both leverage and EBITDA in a jurisdiction that views leverage particularly negatively. We think IFRS 16 is a change for the worse (leases don’t have bullets, which are the largest risk with debt), and it is particularly inappropriate for Ströer, whose leases are diffuse, and they are essentially the only viable tenant. Most leases are flexible, and commitments can be scaled down in adverse conditions, as we saw in recent years.
• Multiple accounting rule changes & segment re-alignments – these make Ströer tricky to model (many questions/clarifications required for IR!). Also, we’ve never seen this level of errors in sell-side models: major assets omitted, tax materially overstated, ownership stakes misquoted, errant IFRS 16 adjustments, revenue levels 10%+ below management guidance, etc.
• Comp set – analysts that cover Ströer also cover JCDecaux.  Most of them recognize that Ströer is the higher quality business, but that rarely translates to more than a 10-20% EBITDA target multiple premium.  In our view, Lamar is the more appropriate comp.
• Stale Bear Raid – Muddy Waters staged a bear raid in 2016. The key points (below) have been clearly refuted, but occasional copycats, along with Wirecard’s shadow on the DAX, have weighed on the stock:
  • Share pledging by the founding families – they have done this periodically to raise cash; they recently put the majority of their shares into trusts that prevent pledging
  • Related party transactions – SAX was formed by the gradual merger of Mueller & Ströer family businesses, which meant there were periodic related party transactions earlier on. None of these strike us as improper, and the only one still relevant is a portfolio of billboards in Berlin owned by the Ströer family and managed by the company (this contract is beneficial to the company, though it would be nice if the regulator were to allow them to buy in this portfolio eventually)
  • Noncore M&A – they spent over EUR 500mn on non-core investments in the mid-2010s. Most of these were small investments to diversify and learn adjacent businesses at a time when the company was wary about disruption from online advertising. While some of the investments were busts, the returns overall were excellent (these included t-online, Statista & Asam); the strategy was sound (especially for a family business); and it is now over.
• Elimination of Large Seller Overhang – we believe the stock has been impacted by DT’s sell-down of its stake from 10% to 2.5%.
• Recession Fears – most recently, the stock has come under pressure as the market fears that the macro environment will lead to a pullback in German ad spend.  Even if this happens, we still expect Ströer to show growth because they are lapping COVID-affected periods

What is it worth?

• We see Ströer trading at 8%+ 2022E FCF yield; after adjusting for noncore asset sales, this rises to ~20%
• Dividend yield north of 5%
• SOTP – we value Ströer at more than double the current price on a sum-of-the-parts basis:

• Ströer unveiled five-year projections in October 2021 that indicated strong growth: consistent with their track record and well ahead of what the sell-side has been modeling: 9-12% revenue CAGR for OOH; 5-6% revenue CAGR for DDM, 9-12% combined (OOH+DDM) EBITDA CAGR, and a 2026E “cash contribution” projection of €400-480mn (EBITDA minus leases, minus CapEx, but pretax).
  • Ströer should generate well more than the current market cap in cash over the next five years: €4ps average annual FCF + 2023 Asam sale at €10ps + 2024 Statista sale at €35ps = €65
  • This implies a 5-bagger, without giving any credit for the small cell opportunity.
  • We also consider a downside case, which contemplates: (a) a 50% haircut to the two noncore assets; (b) a 20% haircut to 2026E FCF; and (c) a 25% haircut to the exit multiple. These assumptions still imply an IRR north of 40%.

Catalyst

• sale of noncore assets
• growth