oOh!Media OML
January 12, 2022 - 7:25pm EST by
skw240
2022 2023
Price: 1.69 EPS .09 .11
Shares Out. (in M): 592 P/E 20 15
Market Cap (in $M): 722 P/FCF 20 15
Net Debt (in $M): 68 EBIT 112 136
TEV ($): 790 TEV/EBIT 9.8 8.1

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Description

I recommend a long in oOh!Media, the largest out-of-home advertiser in Australia and New Zealand. The business has faced a series of challenges for the past several years including: 

  1. A shallow industry-wide ad market recession in 2019 (earnings guidance cut) 
  2. COVID, resulting in a dilutive equity offering at the market bottom in 2020
  3. Ongoing population lockdowns in Australia and New Zealand throughout 2021 
I believe the setup over the next few years is compelling with upside from re-opening normalization, the resumption of long-term growth in the Australian OOH category, board changes, meaningful margin expansion levers, minimal contracting risk, and a cheap entry valuation. 
 
Attractive growth industry 
Australian ad spend today is roughly ~30% desktop internet, ~25% mobile internet, ~23% TV, ~7% radio, ~6% newspaper and ~5% out-of-home (OOH). 
 
OOH has been a consistent share gainer in Australia for the past twenty years. While Australian ad spend has historically grown at a CAGR of ~2-3%, the Australian OOH market has grown from A$379M in 2003 to A$1.3B in 2019, or a ~10% CAGR over the same period and significantly outpacing the broader market. Growth reversed in 2020 / 2021 due to COVID. However, the market has been slowly recovering with industry revenues currently running at ~75% of pre-pandemic levels. 
 
OOH's strong performance is explained by several factors:
  • Effectiveness as a brand-building ad medium (large reach, not skippable, cost-effective cost-per-impressions)
  • Demographics / urbanization driving audience growth 
  • Structural declines in other channels like TV, radio and newspapers
  • A shift to digital boardboards (shorter deployment lead times, more engaging presentation, interactive / dynamic messaging, improved measurement, etc.)
  • Growing consensus that OOH complements and amplifies search and social digital channels          
OOH remains underpenetrated in Australia. Despite having one of the most urbanized populations in the world (90% urbanization rate in Australia vs. Japan at 93%, UK at 82%, Spain at 79%, France at 79%), OOH share in Australia is still  lower than comparable countries (UK / Spain OOH share are both at ~7%, France / Japan at 12%) with OOH ad share generally correlated with urbanization levels. 
 
PwC and the Company estimates that OOH share will grow from ~5% of the Australian ad market to ~7.5% by 2025 and ~10% longer-term. 
 
Dominant market position
The Australian OOH industry has consolidated into an oligopoly between oOh!Media (~46% share), JCDecaux (38%), and QMS Media (14%; owned by Quadrant Private Equity). oOh!Media is the dominant market leader. oOh!Media wins because of the quality of its audience via its strategic inventory and locations, the diversity of its channels across multiple OOH formats, and increasingly its consumer data insights. 
 
 
Significant margin upside
oOh!Media experienced significant margin expansion from 2012 to 2017 with EBITDA margins rising from 12% to 24% as a result of digitization gains (digital mix went from 17% to 60%; digital billboards carry double the margins of static billboards) and the operating leverage of the business. Operating leverage was muted in 2018 and 2019 as the Company made significant investments in opex to enhance their data and technology platform. 
 
I believe EBITDA margins are poised to grow from pre-pandemic levels to high-20% over the next five years due to a few factors:
  • Structural cost take-out: oOh!Media restructured its cost base during COVID and has realized A$10M of permanent cost savings going forward, representing ~150bps of margin improvement versus the pre-pandemic baseline 
  • Operating leverage: ~70% of costs are estimated to be fixed and ~30% are variable. In 2020, observed operating leverage was ~35%, as revenues declined 34% but EBITDA declined ~55%. As oOh!Media returns to growth, operating leverage in reverse should deliver another 300bps of margin expansion off the pre-pandemic baseline 
  • Digital conversions: While digital conversion is maturing (~60% of revenues today are digital), the ongoing conversion of static to digital billboards should continue to yield further margin improvements. The Company pared back capex during COVID to protect liquidity but digital conversion should re-accelerate as capex returns to normalized levels. Digital billboards operate at twice the EBITDA margins of static versions (~50% EBITDA billboard-level margins for digital vs. ~25% margins for static)
  • Programmatic upside: Programmatic (automated buying, selling and delivery of OOH ad inventory) is a meaningful opportunity for the OOH industry as a whole and its impact should become more visible in the next few years
    • oOh!Media is focused on this area and recently hired its first Chief Technology and Information Officer with a mandate to continue developing oOh!'s internal technology platforms to access this emerging opportunity 
    • Programmatic adoption is still in its infancy but offers meaningful upside - operators can automate workflows / reduce costs, reduce friction for ad buyers and onboard a broader base of self-service SMEs, charge higher prices, and access significant ad budgets currently invested in digital media and not historically available to OOH operators due to gaps in targeting, buying tools, and measurement
    • Competitor JCDecaux has set a target for 15% of its digital bookings to come from programmatic by 2023 from just 2-4% today (versus~70% programmatic adoption across the broader digital media category)
    • Industry analysts estimate programmatic could add an additional ~30%-50% to EBITDA over time through both incremental revenue growth opportunities and higher margins (GS estimates ~60% billboard-level margins for programmatic via reduced media agency commissions and improved bidding efficient)
 
Repaired balance sheet / underlevered
After a A$167M emergency equity raise in March 2020, leverage has been significantly reduced. The company today has $94M of net debt, or ~1.5x depressed 2021 EBITDA and ~0.6x 2019 EBITDA (pro forma for cost savings). The business has historically operated at 1.5x - 2.0x net debt, and as EBITDA recovers and the business returns to cash flow generation, I expect the business to be significantly overcapitalized within the next few years. With limited M&A alternatives (the industry has already reached end-state consolidation), I expect the business will either resume dividends or announce share buybacks. 
 
Improved governance
As part of the emergency equity raise last year, HMI Capital Management founder Mick Hellman (former Hellman & Friedman partner, the largest shareholder of oOh!Media, and a shareholder since early 2017) took a seat on the Board. I believe a significant and credible shareholder on the Board provides a lot of comfort around future capital allocation and strategic decisions.   
 
Minimal recontracting risk 
The renewal pipeline for the next few years is favorable, with only ~5% of revenues up for renewal in 2022 and ~33% over the next three years. 
 
Attractive relative and absolute valuation  
oOh!Media trades at ~7x 2019 EBITDA (pro forma for cost savings) and ~5x 2025 EBITDA factoring in the earnings drivers discussed above. 
 
This compares to historical transaction precedents for Australia OOH assets at 9-12x EBITDA (Adshel at 12x, JC Decaux / APN Outdoor at 13x, Quadrant / QMS at 9.5x), global OOH peers like Outfront, Lamar, Clear Channel, and JCDecaux trading at ~13x 2023 EBITDA, and a historical trading range for oOh!Media in the 9-10x range.  
 
Maintenance capex is only ~$5M per year or so, and inclusive of renewal capex (infrastructure investments as part of a concession renewals) comes out to ~$25M per year, highlighting the strong steady-state free cash flow potential of the business relative to the current market cap. I believe the stock can reach A$4 per share by 2025 (from A$1.67 per share today) based on a 10x EBITDA multiple, revenue normalization by 2023 and HSD growth thereafter, meaningful margin expansion, and capital allocation / buybacks.    
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

  • COVID recovery
  • Share buybacks 
  • Programmatic
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