Have you noticed how many advertising billboards are plastered along busy roads or in shopping centres or airports these days? Or how many of them show moving digital images, rather than static pictures, and have interactive features?
Growth in out-of-home advertising is good news for industry leaders such as oOh!media and APN Outdoor Group, both of which listed on ASX last year through Initial Public Offerings (IPO).
oOh!media raised $168.8 million at $1.93 a share and listed in December. APN raised $329 million in November by offering shares at $2.55. Both stocks have delivered so far: after a slow start, oOh!Media has rallied this year to $2.24 and APN Outdoor Group trades at $2.74.
Chart 1: APN Outdoor Group
Media bears might be surprised at the performance. A fragmenting advertising market has crunched traditional media companies in this decade. Outdoor advertising, such as roadside billboards, looks about traditional as it gets, but there’s a lot more to it.
The out-of-home advertising category is outperforming the general advertising market. It enjoyed compound annual growth of 8 per cent over four years to 2013 – more than triple the growth rate of free-to-air television and radio, according to oOh!Media’s prospectus.
Audiences for out-of-home advertising grew 10 per cent annually over three years to mid-2014. Higher vehicle usage and shopping-centre patronage, better presentation of outdoor ads and the increasing digitisation of them are driving growth.
Digital signage can have multiple advertisers and time-sensitive advertising. Breakfast advertising in the morning; fast foods at lunch; cinema promotions at 5pm, for example. The result: more advertisers paying higher yields to outdoor-advertising providers that own prime positions.
Digitisation should drive faster market-share growth for out-of-home advertising, from 4.1 per cent of the total advertising spend in 2013 to more than 5 per cent in the next few years. It is clearly a transformative change for the out-of-home advertising industry.
Although they operate in highly competitive markets, oOH!Media and APN Outdoor Group have stronger sustainable competitive advantages than is widely realised. Their combined ownership of prime advertising sites, such as large-format billboards, is a barrier to entry for smaller players, as is their ability to invest in digitisation of signage and secure prime spots.
I rate both companies and slightly prefer oOH!Media. It is the largest player in out-of-home advertising, with an estimated 34 per cent market share. APN Outdoor is thought to control just over a quarter, with AdShel and then JCDecaux having the rest.
Chart 2: oOH!Media
oOH!Media is particularly strong in roadside billboards, shopping centres and airports: key segments for out-of-home advertising and a natural fit with signage digitisation. Electronic signage at a busy intersection allows the rotation of ads, while consumers can use smartphones to access more information from digital signs at shopping centres and airports. The potential to see an electronic sign at a shopping centre, scan for a discount coupon, and walk straight into a shop is compelling.
These segments also have reasonable barriers to entry. Large-format billboards along roads take time to be approved by councils and constructed, while prime advertising spots in large shopping centres and airports require good client relationships. oOH!Media’s scale provides greater opportunity to invest in technology, create greater functionality, and maintain pricing power. Contract loss and renegotiations at less favourable terms are key industry risks.
I like industries where there are cyclical and structural tailwinds. Out-of-home advertising should benefit from a slowly improving economy in the next few years, the ongoing fragmentation of traditional media, digitisation, and continued strong growth in hand-held stgices and interactivity.
As the industry grows, oOH!Media, the incumbent, should be able to lift advertising yields, find new revenue opportunities and drive earnings growth. A pro forma Earnings Per Share (EPS) forecast of 14.8 cents in CY15 implies a prospective Price Earnings (PE) ratio of about 15 times. That is not excessive for a well-run growth company that leads an industry that is outperforming the broader advertising market.
As a small-cap company, and recent IPO, oOH!Media suits experienced investors comfortable with such stocks. It is a 3-5 year play as the company leverages current and future investments in electronic signs, and much more of a “new media” play than is widely realised.
oOH!Media is another interesting media company coming to market through the IPO market. This column has followed media-monitoring group iSentia Group, which has performed well since listing.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at Feb 5, 2015.