Stroer Media SAX.DE
March 31, 2014 - 8:51pm EST by
rii136
2014 2015
Price: 13.08 EPS $0.00 $0.00
Shares Out. (in M): 49 P/E 0.0x 0.0x
Market Cap (in $M): 639 P/FCF 13.2x 11.9x
Net Debt (in $M): 326 EBIT 48 54
TEV ($): 965 TEV/EBIT 0.0x 0.0x

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  • Discount to Peers
  • Advertising
  • Shareholder Base Rotation
  • Insider Ownership

Description

Want to own high quality billboard assets at a 3x+ discount to peers?  Stroer is a German media company with 53% market share of the outdoor advertising market in Germany trading at a 3x discount to its best comp (Stroer = 7.8x 2014, JcDecaux 10.9x), and a larger discount to US peers (e.g. CBS which just IPOed at 12x).  ~80% of EBITDA comes from their German outdoor advertising business, which we think is a phenomenal asset that is arguably close to on par with assets in the US, and better than JcDecaux's assets.  About 10% EBITDA comes from their billboard business in Turkey, and another 10% comes from a billboard business in Poland and a small online advertising business.  The stock has been depressed for some time, more recently due to noise in Turkey which is a relatively immaterial part of the business.  Ultimately, we think the discount to peers is unwarranted, and that continued stregnth in the core German business, as well as continued momentum in the online business, will eventually drive a valuation closer to peers.  When Stroer IPOed 2 years ago, it IPOed at a valuation in excess of JCDecaux.  If it converges to the valuation of JcDecaux, the stock would have to go up 60% - if the discount merely closes modestly (to 9.5x), we think there's 40% upside.  Management is well aware of the discount to peers and also very aware of appetite for these assets in the US, and expect them to more aggressively ramp up marketing to US investors in the coming months which, combined with continued fundamental improvement, should drive a rerating. 

 
Overview of the business:
German Outdoor (80% of EBITDA):

By way of background, unlike the US, the bulk of Europe does not allow for private businesses to put up billboards.  Rather, the bulk of billboard / outdoor advertising assets are owned by municipalities and awarded through a public tender process every 5-10yrs.  This is the way the bulk of JcDecaux's business works, as well as for Clear Channel and others who have substantial operations in Europe.  Because the business is done through public tender, the process is more competitive than in the US and margins tend to be lower.  This is one of among several reasons why it makes sense for the European billboard companies to trade at a discount to US peers, who tend to enjoy higher barriers to entry.  In Germany, however, there are both public tender and private contracts.  Stroer has the vast majority of private contracts, with over 15,000 contracts with individual landowners to put billboards on their properties.  Contracts are 5-10yrs, with no rent escalators, automatic renewals, and right of first refusal to match a competitor if someone tries to bid for the contract on renewal.  Their private business, which we estimate is about 50% of German revenues but the bulk of profits, is a phenomenal business - many of their contracts date back to the 80s, and there has not been any material new entrant to the space in years.  Because there is no material #2 to buy, and because Stroer has already locked up most private landowners with long-term, first right of refusal contracts, it's very difficult for a new entrant to break in. Stroer acquired most their smaller competitors years ago in the private space, such that the market is now basically a duopoly between JcDecaux & Stroer on the public side, and basically only Stroer on the private side.  Stroer's private business consists primarily of billboards (in their billboard segment) and train station advertising (in their transport segment).  Stroer has a long-term agreement with Deutsche Bahn for all train station advertising throughout Germany. This includes the Frankfurt train station (350k passengers per day), as well as the train stations in all major cities, many of which have 100-250k passenger/day    To put this in perspective, Grand Central has 500k passengers per day and the Frankfurt airport has 90k passengers/day.  Unlike the outdoor billboards, which are almost all static / scrollers, the billboards in train stations are increasingly becoming digital, which has the similar favorable economics that people call out in us names.   As a side note, outdoor digital billboards have not taken off materially in Germany, in part because the billboards are much closer to the roads / where people are, meaning you need higher quality screens (read: more expensive) to ensure the picture doesn't appear pixelated.  Eventually, Stroer should have the same opportunity others do to digitize their outdoor boards.

The second part of the Outdoor business is the public, which is made up of 4,000+ 10-15yr contracts with local municipalities.  Unlike the private boards, which often times aren't in prime locations, the bulk of the prime locations in Germany are owned by the municaplities.  About half of Stroer's revenue comes from their public contracts, but these are materially less profitable.  Stroer uses their private network to subsidize their public network, allowing them to build out better density and use the prime locations to sell their higher margin public locations.  This business consists of a combination of public billboards, street furniture, and bus advertising.  The main competitor in this business is JcDecaux, who doesn't have a private network in Germany and thus often has trouble earning satisfactory margins in Germany V. Stroer who can subsidize their public tenders with their high margin private boards. After several years of infighting on contracts, Stroer and JcDecaux recently have started to play more nice.  In a recent large municipal contract, JcDecaux bid on the Street Furniture and didn't even bid on the billboards, and Stroer bid on the billboards but not the street furniture - longer-term there is clearly upside if Stroer doesn't use its might as much to buy market share, and if the two play together a bit more constructively, which there are increasingly signs of.

A few more random tidbits from our dilligence:

**Estimated by advertisers that Stroer touches 15% of the population each day, one of the only options other than television that can reach that many people if you want to do a big branding / awareness campaign

**Outdoor should take share from traditional media spend (magazine & newspaper), which is unusually high as a % of total spend relative to other European countries & the US As those media decrease in relevance and reach. 

**On the public side, a lot of the market share split between JcDecaux and Stroer is on a city by city basis - there are certain "monopolistic" cities where Stroer literally controls all outdoor advertising (between public & private), and others where JcDecaux dominates through their public tender biz (but Stroer still participates on the private side)

**One of the other big differences between Stroer's business and the US operators is their mix of local advertising revenue.  Historically, Stroer has earned the bulk of their revenue from national advertising campaigns rather than local campaigns targeted based on proximity to a certain shop or location.  The company has historically had 90% of it's business "campaign based" rather than "sign based" (e.g. exit 232 for McDonalds). The company is working this year on building out a larger local salesforce to attract more of this lucrative, stickier business.

Turkey Outdoor (~10% of EBITDA):

Stroer's Turkish business is primarily consists of 160 public tender contracts.  They have 58% market share of Turkish outdoor advertising, with the #2 player (Clear Channel) having 13%.  Despite all the noise in Turkey, this business grew high single digits late last year in organic terms, and should continue to grow modestly in local currency in 2014 (down 15-20% in US dollars, which is incorporated in our numbers), based on management's comments and our own checks with players in the Turkey.  We don't claim to have any unique insight into the macro situation in Turkey, but based on our conversations believe it is unlikely that there is anything that would happen politically that could result in Stroer being stripped of these contracts, which is our primary worry in the long-term.  Despite obvious issues in this geography, we think this relatively small part of Stroer's business has had an outsized impact on the stock price over the past few months.  Another way to think about the potential impact from Turkey is that if EBITDA went to zero (was 8.5m in 2009), we'd still be buying Stroer at this price for 8.7x EBITDA.

Online/Poland:  
Poland is 4% of EBITDA today.  Stroer has 33% market share, #2 player has 25%, #3 player has 15%.  The market is a lot more competitive, it's not a great market for them, they've suggested they will likely sell this business at some point in the near future.
 
The remainder of the business is a collection of online advertising assets. Stroer, over the past year, has built what is now the largest independent online advertising firm in Germany outside of Google.  The business is a mix of vanilla exclusive premium ad inventory management (Stroer acts as the exclusive sales agent for a given website and takes a 30% commission), as well as one of the leading ad exchanges and real-time bidding platforms in Germany (Ad-scale).  Management's logic is that they have a large national and local sales force that has relationships with the 3 major advertising houses and many small businesses in Germany, which allows them to cross-sell online ad inventory through their existing sales force.  The online advertising market in Germany in particular is much more nascent than it is in the US, both in terms of penetration and technological advancement.  The two largest independent online advertising companies after Stroer are division of Deutsche Telecom & United Internet, where they are tiny pieces of largely unrelated businesses.  Although we initially viewed Stroer's foray into online as a negative, we have since become more neutral.  Although we are not crazy about the exclusive rep business (which is increasingly becoming outdated in the us), the adscale business is where things are likely headed in online in the us and Germany, and should put stroer in a good position going forward. We don't ascribe much growth or margin expansion in online, and view it largely as a free call option. We also do not expect management to spend any further material amount in acquisitions in this business going forward.
 
What has happened - A snapshot in numbers:

Since it's IPO at 18 euro in 2011, Stroer has been re-rated materially lower, both on an absolute basis and relative to peers.  Despite the stock rebounding partially in 2013, the discount to peers has actually widened from it's lows in the summer of 2013:
 

Comps - January 1, 2011 (after IPO)        
        FY 10 LTM Multiples
Ticker Company Mkt Cap EV Revenues EBITDA Revenues EBITDA
           
ENXTPA:DEC JCDecaux SA $5,206.0 $5,176.0 2,350.0 535.0 2.2x 9.7x
CCO Clear Channel Outdoor Holdings Inc. $4,978.4 $6,845.9 2,798.0 641.0 2.4x 10.7x
LAMR Lamar Advertising Co. $3,819.9 $5,921.9 1,092.3 464.2 5.4x 12.8x
SWX:APGN APG|SGA SA $411.8 $400.5 306.6 51.3 1.3x 7.8x
               
Peer Avg           2.8x 10.2x
DB:SAX Ströer Media AG $1,139.2 $1,488.2 531.4 127.3 2.8x 11.7x
               
Premium (Discount) to Peer           1.5x
Premium (Discount) to JcDecaux           2.0x


Comps - Stroer @ 8 in summer of 2013        
        LTM   LTM Multiples  
Ticker Company Mkt Cap EV Revenues EBITDA Revenues EBITDA
ENXTPA:DEC JCDecaux SA $4,673.0 $4,743.0 2,622.8 556.7 1.8x 8.5x
CCO Clear Channel Outdoor Holdings Inc. $2,719.4 $7,356.9 2,945.9 696.0 2.5x 10.6x
LAMR Lamar Advertising Co. $4,525.6 $6,627.5 1,200.1 519.8 5.5x 12.8x
SWX:APGN APG|SGA SA $638.0 $552.0 320.0 70.0 1.7x 7.9x
               
Peer Avg           2.9x 9.9x
DB:SAX Ströer Media AG $324.1 $645.4 560.6 100.9 1.2x 6.4x
               
Premium (Discount) to Peer           (3.6x)
Premium (Discount) to JcDecaux           (2.1x)
 
Comps - 3/31/2014              
        FY13   LTM Multiples   FY14E Mult
Ticker Company Mkt Cap EV Revenues EBITDA Revenues EBITDA EBITDA
ENXTPA:DEC JCDecaux SA $7,105.8 $7,175.8 2,676.2 598.0 2.7x 12.0x 10.9x
CCO Clear Channel Outdoor Holdings Inc. $3,273.1 $8,092.1 2,946.2 719.9 2.7x 11.2x 11.4x
LAMR Lamar Advertising Co. $4,836.7 $6,742.3 1,245.8 534.9 5.4x 12.6x 12.0x
SWX:APGN APG|SGA SA $3,510.0 $4,928.2 1,294.0 407.0 3.8x 12.1x N/A 
CBSO   $883.3 $767.4 306.4 70.0 2.5x 11.0x 11.2x
                 
Peer Avg           3.7x 12.0x 11.5x
DB:SAX Ströer Media AG $642.1 $1,007.5 602.5 116.2 1.7x 8.7x 7.8x
                 
Premium (Discount) to Peer           (3.3x) (3.6x)
Premium (Discount) to JcDecaux           (3.3x) (3.1x)


What has happened - In Narrative:
Cerberus helped Stroer finance the business in 2004, giving them debt plus warrants equal to 15% of the company to buy their largest peer in Germany.  In late 2010, Stroer files with Cerberus selling their stake, as well as the company raising capital to delever the balance sheet.  The two founders, who together own approximately 55% of the business, purchased additional stock in the IPO.  The company promised double digit growth, due to modest secular growth as well as format upgrades (scroller in outdoor, digital in tranportation).  Instead of growing topline and EBITDA, the business declined, due to a dissapointment in the Turkish business, followed by negative growth (and resulting operating deleveraging) in the German business, largely due to a pullback in overall advertising spend (and outdoor spend in particular) throughout 2012 related to the eurozone crisis.  In 2012, German ad spend declined about 2.5%, and outdoor declined 5%.  The growth investor base that owned the stock dumped it, and Stroer has traded at a large discount to peers and JcDecaux ever since.  The issues in 2012 in Germany were largely related to macro factors - outdoor ad spend has a longer-lead time and more firm commitments, due to the nature of the advertising (you need to physically put up an add), vs. television and other media which allow for more flexible ad buying throughout the year.  Because of the uncertainty in the Eurozone in 2012, ad buyers were hesitant to enter into firm contracts, and thus shifted spend towards categories that were more flexible.  Stroer's German outdoor business grew about 2.5% in 2013, and should grow a simillar ammount next year.  Management has also taken their medicine and is guiding much more conservatively, allowing them to beat every quarter this year and rebuilding their credibility in the market.
 
Catalysts:
**Increased US marketing / Investor attention on high quality asset in a hot space trading at a large discount to comps
**Continued improvement in the German outdoor advertising spend and associated operating leverage
**Calming of newsflow in Turkey and/or this business increasingly becoming a smaller piece of the overall business
**Continued growth and momentum in Stroer's online businesses
 
Risks:
**Noise in Turkey continues to depress multiple and/or makes this uninvestable for certain investors...if Turkey falls apart possible this business in the short-term goes to earning nothing...also, more reaslistically, currency headwind continues to depress growth.
**Component of fixed price contracts in public tenders in Germany, which can give operating leverage both ways - if German economy is weak, EBITDA could decline materially.  Leverage (3.1x) could get uncomfortable in this scenario
**Capital allocation / control - management arguably made questionable capital allocation decisions relating to their internet business as well as rolling out scrollers in Germany.  Some discount due to this / mix of non-billboard businesses is likely warranted relative to peers.
 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

*Increased US marketing / Investor attention on high quality asset in a hot space trading at a large discount to comps
**Continued improvement in the German outdoor advertising spend and associated operating leverage
**Calming of newsflow in Turkey and/or this business increasingly becoming a smaller piece of the overall business
**Continued growth and momentum in Stroer's online businesses
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