An improving revenue trend and a share buyback announcement outweighs the patchy first half result, in our view. The stock is cheap but is beholding to an uncertain advertising environment.
1H22 adjusted underlying EBITDA of $51.5 million increased 62% but the revenue equation was not so convincing. 1H22 revenue growth of 10.4% was well below the 19.5% industry growth rate. May and June had weaker revenue resulting in 2Q22 revenue growth of just 4%. The good news is that 3Q22 growth has picked up, +37% compared to last year for media revenue. Overall, revenue is almost back to 2019 levels even after the impact of losing the Sydney Trains contract.
The soft 1H22 revenue outcome will flow through to FY23f consensus estimates, combined with more conservative assumptions from the broader advertising market.
The balance sheet has gearing of just 0.4x net debt to adjusted underlying EBITDA against a target of 1.0x in the short term. The company reinstated the dividend and has announced a buyback of 10% of issued capital amounting to approximately $75 million.
Investment view
The Out of Home category is expected to continue to nibble away at the market share of the advertising pie. COVID-19 has only interrupted the progress made to date and with movement restrictions now passed, the upward trend can resume.
OML will accelerate its capex in 2H22 to $25-35 million (previous guidance $45-55m) compared to $15 million in 2021. Normal capex will be around $40-60 million when conditions fully recover.
OML is exposed to the highly cyclical advertising market. The economic uncertainty from rising interest rates and inflation will impact on consumer behaviour and ultimately reflect in advertising decisions. This means OML’s near term earnings are likely to be vulnerable to changes in advertising demand.
The long term outlook is more promising as the outdoor industry continues to improve its product and measurability.
There is plenty of valuation headroom on OML, but the short term ad market conditions will keep investors cautious on the earnings outlook. We have therefore revised our recommendation to Hold from Buy.
Risks to investment view
If the Outdoor advertising sector recovers more slowly than expected, or major contracts were lost, earnings would be affected.
Recommendation
We have reduced our recommendation to Hold.
