I’ll be watching you

Picture this: a highway billboard advertisement for insurance changes as you approach it. The digital sign senses your car’s make and model and creates a tailored ad. Instead of a static insurance ad, you view a discounted offer for your car (hopefully, without crashing!).

Another digital sign at a shopping centre senses how many people look at it and shows the moving tally on the screen. Consumers want to know why 23,000 others have watched that screen today, creating more “eyeballs” and “buzz” for the advertised brand.

Meanwhile, a digital sign at an airport is fed data that tracks Chinese tourists based on their flight information. The sign advertises hotels, tours, restaurants and airport transfers for that market. Digital signs at hotels and tourist attractions contribute to the China advertising blitz.

In the CBD, a digital sign is aimed at young adults who commute to university. The sign includes a free wi-fi hotspot and phone chargers. The advertisement includes QR Codes that university students scan with their smartphone to receive a discounted fast-food snack offer.

These are just some examples of how technology is transforming out-of-home advertising and making it one of the fast-growing marketing categories. And why outdoor advertising stocks such as Ooh Media (ASX Code: OML) have attractive long-term prospects.

I doubt the market fully understands how technology could disrupt outdoor advertising – and the opportunities that it will create for advertisers. Most focus so far has been on the benefits as outdoor billboards are digitised, lifting ad yields and the scope for tailored marketing.

Consider what’s ahead. As facial-recognition technology develops, a digital ad in a shopping centre could know who is looking at it and create a personalised marketing offer based on the shopper’s purchasing behaviour at a retailer, using data from a customer loyalty program.

Facial recognition will also determine how consumers feel about a product when they view the advertisement – valuable information that could be sold to retailers. Few analysts talk about outdoor advertising firms as data companies, although that could be their future.

The ability to interact with digital signs opens many possibilities. Younger commuters, for example, might use an inner-city digital sign to download music, charge their phone, buy a movie ticket, access a discounted offer and catch up on entertainment news.

Yes, it sounds a bit like Blade Runner, the science-fiction movie classic that had a backdrop of giant, personalised digital ads that talked to consumers as they walked by.

Thankfully, we’re still a long way from that scenario, but there are numerous examples worldwide of innovation in digital outdoor advertising.  Industry boundaries blur when you think of digital signs as a network of customer data-capture and connection points.

Short-term challenges

It’s dangerous, of course, to look too far ahead with megatrends or be seduced by technology’s potential. The reality is that most billboards in Australia are static (a traditional ad plastered on a billboard) rather than digital. Like other advertising categories, the outdoor market has many challenges, a reason why Ooh Media is now trading at its 52-week low.

The immediate threat is this week’s New South Wales election and the Federal election in May. Big advertisers typically hold back their marketing during elections for fear of being drowned in the noise. Newspapers, TV and other traditional media get some benefit from election-related ads; that does not flow through to outdoor advertising because many of these signs are on government-owned property (bus shelters, roads etc).

The economy is another headwind. For all their potential, outdoor advertising firms are not immune to a slowing economy that encourages marketers to defer or cancel spending. Also, a likely change of Federal government will create an extra reason to put ad campaigns on hold, at least for a few months.

The good news is that these and other cyclical threats have created value in Ooh Media (more on that later) for investors who can look at least one to three years ahead.

Attractive industry

Outdoor advertising has five structural drivers. The first is Australia’s population growth. Larger urban populations, longer commute times and more people out and about mean a growing audience for outdoor ads.

The second driver is billboard supply. Once, outdoor ads mostly clustered along busy roads. Today, shopping centres, airports, bus shelters and offices earn revenue from digital billboards.  Like it or not, we’ll see many more digital billboards on assets not normally associated with advertising, which will create opportunities for outdoor ad firms.

The third driver is audience measurement. Current systems such as MOVE have limitations in assessing eyeballs on ads, but they provide data for advertisers to measure their marketing spend. As audience-measurement technology improves, advertisers will be more comfortable devoting a larger portion of their budget to this medium.

The fourth driver is technology. Digital signs have higher advertising yields than static ones and they allow more ads to be rotated through a single sign. Also, it’s much faster and cheaper to change a digital sign than install and remove a plastered one.

The fifth driver has had scant discussion: the ability for smaller advertisers to market directly on digital billboards, bypassing advertising agencies and their fees. Ooh Media wants to build its direct advertising business, now a small part of the operation. Having a larger channel of advertisers (presumably smaller enterprises) could open a new market for Ooh Media and diversify and broaden its sales channels.

Combined, these factors helped the out-of-home advertising market build a 5.4 per cent share of Australia’s advertising industry in 2017, PwC data shows. The industry has projected compound annualised growth of 6.7% in 2018-2022.

Growth in digital outdoor ads will more than double the average and have 71.5% share of the overall out-of-home market by 2022, from 47.3% in 2017, forecasts PwC.

Put another way, almost three in four outdoor billboards in Australia will be digitised within a few years.

Ooh Media best placed

There’s not much choice in outdoor advertising stocks on ASX. Global advertising giant JCDecaux acquired APN Outdoor Group for $1.12 billion in June 2018.

QMS, a micro-cap outdoor advertising stock,  has disappointed with an annualised total return of minus 13 per cent over three years, Morningstar data shows.

That leaves Ooh Media, which raised $168.8 million at $1.93 a share and listed on ASX in December 2014. The market could not get enough of Ooh Media, its stock soaring to $5.34 within two years of listing as analysts rated the potential of outdoor advertising to increase its share of Australia’s advertising market.

Ooh Media traded above $5 in October 2018 before tumbling to its current $3.66. Investors thumped the stock after it released its 2018 full-year result in February 2019. Costs were larger than expected and the company’s guidance for CY19 disappointed.

Moreover, Ooh Media has elevated debt after last year’s $570-million acquisition of Adshel. Net debt to underlying earnings (EBITDA) of 2.6 times compares to 1.4 times a year earlier. Ooh Media has strong growth in operating cash flow (up 41% over the year) and wants to reduce its gearing ratio below 2 times.

But a slowing outlook, rising operating costs, lower-than-expected final dividend and high debt – not to mention a softer advertising market around the election – has spooked investors.

Value emerging

Two key questions for Ooh Media emerge. First, is the company’s disappointing earnings outlook because of short-term cyclical factors that will abate?

Second, does the company’s reduced valuation overestimate the near-term challenges?

Expect a tough first-half CY19 as the election and slowing economy affect advertising volumes. Ooh Media traditionally does better later in the calendar year and that will be true again in 2019. I suspect management’s earnings guidance is a touch conservative given election-related advertising uncertainty.

Higher operating costs are concerning, but the rise in headcount has given Ooh Media more resources in cloud/security services and growth in staff numbers should flatten this year. Higher-than-expected rental costs associated with Ooh Media’s Brisbane City Council contract also weighed on its guidance.

Ooh Media is investing for growth, as it should, given the opportunity. But that does not always sit well in a market addicted to short-term revenue and profit gains, and which pummels small-cap industrials on the slightest guidance disappointment.

On balance,  2019 looks like a year of consolidation for Ooh Media as it digests the Adshel acquisition and gears up for a new growth phase.

At $3.66, Ooh Media trades on a forecast Price Earnings (PE) multiple of 13.2 times in FY2020, consensus analyst estimates show. That is below the ASX 200 average, even though Ooh Media has stronger growth prospects than many industrials and a leading position in an attractive market.

Morningstar values Ooh Media at $4.60 and recently included it in its Best Ideas list. Macquarie’s 12-month target is $5.20. An average share-price target of $5.91, based on the consensus of six broking firms, also suggests Ooh Media is undervalued.

I’m not as bullish as the consensus: 2019 could be brutal for media companies as advertisers cut back amid elections, falling property prices and the weakening economy. But at $3.66, Ooh Media has too much bad news priced into it and offers a margin of safety.

Prospective investors must be able to tolerate further short-term pain in Ooh Media, look out at least one to three years, and understand the risks of investing in small-cap stocks.

Nobody knows for sure when Ooh Media’s share-price retreat will bottom, but the latest sell-off looks overdone. From a charting perspective, Ooh Media needs to hold above $3.40, a point of previous price support. The next stop on the chart is $3 if it breaches that level.

At that level, Ooh Media would surely look attractive to a global outdoor advertising giant or private-equity firm that understands the potential of out-of-home marketing.

Chart 1: Ooh Media

Source: nabtrade