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oOhmedia retail offer is promising, says Morningstar

Lex Hall  |  09 Jul 2018Text size  Decrease  Increase  |  
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billboard APN oohmedia outdoor article

Outdoor advertising is benefiting from population growth and higher density

Outdoor retail player oOhmedia is well placed to benefit from positive dynamics driving the local industry, says Morningstar analyst Brian Han.

Unlike other forms of traditional media, outdoor's audience is rising and digital technology is boosting growth, Han says.

Shareholders in oOhmedia (ASX: OML) have until July 11 to take up a retail share offer, which Morningstar's Han says is worth considering.

"We recommend eligible shareholders subscribe to oOhmedia's non-renounceable 1-for-2.3 shares retail offer at the fixed price of $4.60 a share," Han writes in his latest note.

"The offer price is 4 per cent below the current stock price and 7 per cent below our $4.95 fair value estimate."

oOhmedia is currently trading at $4.69. Morningstar's fair value estimate for oOhmedia is $4.95 per share, which implies a fiscal year 2019 price/earnings multiple - the amount an investor has to pay for every currency unit - of 14.3.

It has an enterprise/EBITDA of 9.1 times and a dividend yield of 3.6 per cent.

Han says oOhmedia's move to acquire to local firm Adshel will cement its position in the market.

Adshel was last month the takeover target of oOhmedia's main rival APN Outdoor (ASX: APN). However, APN then itself became the takeover target of French giant JCDecaux.

JCDecaux acquired APN on the condition it abandon its push for Adshel.

Han says JCDecaux's purchase of APN Outdoor boosts Adshel's strategic importance to oOhmedia.

"By acquiring Adshel, no moat-rated oOhmedia secures its position by having a portfolio of concessions and inventory spanning all major segments," Han says.

"It allows the group to remain relevant in the minds of advertisers keen to exploit the appeal of the outdoor medium."

Han says the deal is likely to gain regulatory approval as oOhmedia has little presence in the street furniture segment of the market that Adshel mainly operates.

Rewards and risks in outdoor

Outdoor advertising's share of the pie has grown from 3.5 per cent in 2009 to 5.1 in 2017, a trend Morningstar says is set to continue.

Han says the outdoor medium has room to grow in Australia, which lags Canada's 8 per cent, the UK's 6 per cent and the global average of just over 6 per cent.

A key reason is population growth, Han says. As living density increases, more people are spending time on the road, on public transport and in retail areas, and therefore spending more time looking at outdoor advertising. 

These are "fertile areas for marketers struggling to reach mass audiences in a fragmenting world", Han says.

Another positive is better feedback. Market leaders such as APN and oOhmedia are spending more on sophisticated systems to track the effectiveness of their ads.

Digital technology allows outdoor players to convert a traditional site to a digital one, making for more flexible campaigns - a boon for marketers.

"We estimate converting a static site to a digital site can lift advertising revenue three- to four-fold," Han says.

However, there are risks.

Despite their three-star rating, oOhmedia and APN are have no economic moat - or sustainable competitive advantage.

In oOhmedia's case, the foundation of the business is the portfolio of leasehold contracts with owners of sites and properties, which exposes the group to periodic renewal risks.

"On average, we estimate about 16 per cent of oOhmedia's concessions come up for renewal every year," Han says.

"The risk is not the group failing to renew these concessions, but the terms on which they will be renewed.

"The industry is competitive and the threat of a rival willing to pass on more benefits to the landlords could lead to a deterioration of economics."


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Lex Hall is a Morningstar content editor, based in Sydney.

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