Stock: APN Outdoor
Symbol: APO
Exchange: ASX
Financial Year-end: 31 December
Latest price: $6.70
Date: August 24, 2018
Sector: Consumer Cyclical
Industry: Marketing Services
Investment Theme: Structural Trends
APO is positioned to benefit from the rise of technology, with fast-growing revenues from digital billboard advertising.
Company Profile
APN Outdoor is a leading outdoor advertising company with 28% market share in Australia and 30% in New Zealand.
Competitors & Markets
APO will rank second behind the combined 50% market share of oOhmedia and Adshel if their proposed merger goes ahead.
APO is active in billboards (55% of total revenue), transit (26%), airports (11%) and rail (8%). Digital advertising grew 18% in FY18 and contributes 42% of total revenue, with 134 large format digital panels across Australia & New Zealand. Non-digital advertising declined 5% due to loss of the Melbourne Yarra trams contract (won by JCDecaux).
Outdoor advertising sites are secured by 5- to 10-year leasehold contracts and may be subject to competitive bidding on renewal of larger sites.
Financial performance
Revenue Growth
Revenue growth slowed to 4% in HY18, compared to an average of 6.7% over the previous two years.
Earnings per share (right-hand scale) declined slightly from FY16.
Margins
EPS decline is a result of tighter margins.
Cash Flow
Cash flows declined relative to net income as APO invested in digital displays.
Dividends
APO declared fully franked dividends of 7 cents (H1 FY18) and 12.5 cents (H2 FY17), amounting to a 2.9% dividend yield.
Capital structure
APO uses debt to fund new digital billboards, maintaining a net debt to equity ratio of 35%. This could render it vulnerable in an economic down-turn.
Weaknesses
Outdoor advertising revenues can be volatile over the economic cycle.
Recent management changes leave APO with new leadership after the retirement of CEO Richard Herring (having led the group since 2004) in September 2017 and CFO Wayne Castle in January 2018.
Takeover Offer
French outdoor advertising giant JCDecaux tabled a AUD 6.70 per share cash offer in June 2018, to acquire 100% of APO. The offer was recommended by the APO Board of Directors and is likely to go to a shareholder vote in October 2018.
The Australian Competition and Consumer Commission’s (ACCC) cleared the proposed acquisition on August 23 but the deal still remains subject to a number of conditions, including approval of APN Outdoor shareholders, court approval, the Foreign Investment Review Board (FIRB) and the New Zealand Overseas Investment Office (OIO) approval, and the satisfaction or waiver of certain other conditions outlined in the Scheme Implementation Agreement lodged with the ASX on 26 June 2018.
APO is expected to declare a fully franked special dividend of up to $0.30 per share just before the takeover. The AUD 6.70 offer per share would be reduced by the cash amount of the dividend but shareholders would benefit from up to $0.13 per share in franking credits.
Valuation
With expected annual revenue and earnings growth of 7%, APO is projected to deliver low annual returns of 6%, or 7.6% after franking credits.
Technical Analysis
APO broke resistance at $6.00 after the JCDecaux offer. Twiggs Momentum (50-week) and Trend Index (50-week) recovered to positive territory but remain weak.
Conclusion
Sell at $6.70. Prospects of 13 cents in franking credits are not sufficient incentive to hang on to APO.
[**Note added 26/08/18: Clarification is required regarding the upcoming dividend of 7 cents plus 3 cents franking credit. Sellers prior to the ex date of September 5th will forego the dividend. Sellers after the ex date are likely to receive a price, probably 7 cents lower. They may wish to wait until September 5th for the benefit of the 3 cents franking credit but need to weigh this against the increased uncertainty.]
Disclosure
Staff of The Patient Investor may directly or indirectly own shares in the above company.
