Outdoor advertising continues to take precedence over TV sets these days and with the digitising of billboards, those companies in this sector are increasingly attracting broker scrutiny.
Growth in the sector has recently been driven by digitisation. Digital revenues in Australian outdoor advertising increased rapidly to 40% of sector revenues in 2016 from just 8% in 2012. The current market generated $790m in net revenue in 2016. The main benefits of digital billboards are flexibility and yield enhancement, as these are able to serve multiple advertisers on the same screen.
Deutsche Bank initiates coverage on the sector with Buy ratings on APN Outdoor ((APN)), oOh!Media ((OML)) and QMS Media ((QMS)), believing pure outdoor stocks should re-rate from current levels, given the underlying sector growth.
The broker is of the view that the high level of urbanisation in Australia relative to the rest of the world provides for a penetration rate that is higher than the global average of 6% for billboards. Population growth, growth in air travel and continued increases in the number of kilometres that are traveled all support the medium.
Deutsche Bank believes the risks to these outdoor stocks are effectively priced in at current levels and multiples do not take into account underlying sector growth. OOh!Media provides exposure to to a highly digitised portfolio and is the broker’s top pick, with further scope to convert static billboards as only 54 of its 4,000 billboards were digitised at the end of 2016.
QMS has undertaken an aggressive expansion and increased its digital billboards to more than 68 as of June this year, from 12 just three years ago. APN Outdoor, which has the lowest proportion of digital revenues relative to the others, is still exposed to favourable dynamics and the recent sell-off represents an attractive entry point, and the broker’s opinion.
Major players in the business are investing heavily in converting static panels into digital. Beyond this year, Deutsche Bank expects this capital expenditure will decline, amid forecasts for the number of digital screens being added to the system to progressively decline. This should in turn support free cash flow over the medium term.
HT&E ((HT1)), while not a pure player in outdoor media as it has a radio segment, has also shown significant improvement in its outdoor division. The company has a strong presence in street furniture, taxis and bus/tram advertising via its Adshel business. Adshel’s performance improved significantly in March and forward bookings remains solid, Credit Suisse observes, and the rate of digitisation is expected to increase in Australia.