BUY HOLD SELL – Ooh Media (ASX: OML)
Ooh Media (ASX: OML) is an Out-Of-Home advertising and media company. It offers advertisers the platform to create engagement with audiences through its portfolio of physical assets, linked to online, mobile and social media. Its road and commute segments are its main earners, contributing to more than 60% of revenue. The business trumpets its product range, scale and data collection resources, able to reach 77% of all metro and regional Australians. The business owns digital publisher Junkee Media, printing business Cactus, and experiential provider oOh!Edge.
Back in March oOh!media announced a $167m capital raising to re-pay debt and position the business to get through the recession. The new equity reduced net debt to $194m from $355m. At the time, there was also speculation HT&E was looking at OML as a takeover target. In early April, HT&E Chariman Hamish McLennan told the AFR that his company was “prepared to be incredibly patient”, treating its acquisition of $15m of OML shares as an “equity investment”. OML in 2018, purchased Adshel off HT&E for $570m, now under the banner of the company’s Commute division.
In January, founder Brendon Cook indicated his intention to step down as CEO although has stayed on through much of the pandemic. Cathy O’Connor was appointed as Managing Director and CEO on Monday. She was previously the CEO of Nova Entertainment Group.
The recovery story has driven the share price since results. OML reported a first-half underlying loss of $17m, down from an $18m profit in FY19. Revenue fell to $205m from $305m in the previous year. Cost savings of more than $80m the main highlight. EBITDA of $10.8m was ahead of Credit Suisse estimates of $3 million but well down on $56m in FY19.
What the market has focused on since, is the gradual improvement in audience volumes as restrictions have eased. Second-half Australian audience uplifts are expected to deliver meaningful revenue growth across Q3 and Q4 vs Q2. Large national advertisers in Australia and New Zealand have also increased their briefing activity and are acting in a more measured approach vs the initial April lockdown.
With increased confidence from lower cases and the hope of a vaccine, audiences continue to return to out of home environments nationally. Total Out-of-Home audience volumes in mid-august were tracking at 75% of their 2019 level, up from a low of ~50% in mid-April. Monday’s research note showed audience levels surged to 82% of 2019 levels nationally. In markets outside of Victoria, audiences are almost back to normal, now at 97% of 2019 levels.
- ROE of -2.2% is poor, but it is forecast to improve in the following periods after shaking off the COVID slump. Capital raising in March not helping either.
- Revenue growth expected to be down 31% this financial year, although there is some evidence to support upside risk. A return to activity out of the home saw audience levels surge in the past week, to 82% of 2019 levels nationally.
- Similar to revenue, EPS growth is likely to be hit hard this year but likely to bounce back near pre-COVID levels in future periods with green shoots starting to emerge.
- Half of the brokers surveyed by Thomson Reuters have a BUY recommendation. The stock is trading at a 19.2% discount to the average broker target price.
- Suspended its dividend policy in March. In FY19, OML had gross yield of 11.7% which is outstanding.
WHAT SORT OF INVESTMENT IS OML?
OML is a recovery play, with a strengthened balance sheet and leading market share in in Australia and New Zealand Out-of-Home markets. Unlike other forms of traditional media, outdoor audience is rising, and digital technology is a growth facilitator. Out-of-Home’s market share has grown from around 5.5% of media spend in 2014 to 7% at the end of 2019. The large sophisticated global media agencies have an even higher allocation to Out-of-Home – at 14% per the Standard Media Index 2019 report.
Management’s ability to respond quickly and effectively to challenges presented by the pandemic not only positioned the company well to benefit from longer-term structural growth, but conveyed an impressive level of competence which has not gone unnoticed.
An upward trend in audiences, in line with restriction easing, ads another layer of confidence to the picture. OML self-assured it “will be able to compete strongly as audiences return to Out-of-Home environments in the successful manner we have over the last 6 years for a larger share of the total media pie.”
Results came in ahead of Macquarie’s estimates. Cost reductions key to the success. The broker notes OML’s fall in revenue was less than the sector average despite greater exposure to highly lockdown-impacted airport and rail advertising. Observes signs of improvement in trading. Credit Suisse is comforted by the outlook, while August revenue was down around -40%, forward bookings indicate the worst is over. A reduction in balance sheet concerns and the decreasing likelihood of future capital raising other positives. Ord Minnett downgraded to HOLD following results despite signs of emerging positivity. EBITDA estimates for 2020 and 2021 cut by -50.7% and -38.8%, respectively.
OML is up 80% since its March low and up 16.4% since reporting on August 24. RSI is elevated although not in overbought territory which it breached following results. OML is a great example of a company with a solid post results reaction. It has de-risked itself and the market is clearly pleased with the recovery story despite falls in some key performance metrics. Much like the economic data that has rolled through in recent weeks, much of the attention is now focused on what lies ahead. Not on historical statements. There is obvious resistance around 100c, which the stock has traded close to since reporting. With 100c being such a significant technical level, any opportunity to purchase beneath it would be appealing.
There were some substantial purchases before the end of the financial year likely relating to the equity raising. HMI capital, San Francisco-based private equity firm who was a sub underwriter in OML’s emergency capital raising picked up ~60m shares in April, a time when OML even told the ASX its stock was significantly undervalued. HT&E also spent $15m on a 4.2% stake (not showing up in the Reuters data however). More recently, Vanguard bought more than 15m shares mid-August. The tide is clearly favouring bulls with solid support from a couple of heavy hitters.
From March to April there was a massive increase in short interest, topping out at 14.21% on April 2. A ‘short squeeze’ through the first week of April saw interest fade, currently at 1.84%. A level that should not drive much concern, especially with the worst (restrictions/lockdown) likely behind us.