Last week I recommended taking the +40% gain we generated in Southern Cross Media Group (SXL). Interestingly, the next day, Nine Entertainment Group (NEC) sold their 9.9% holding in SXL, which effectively took out any takeover premium in SXL shares. I reaffirm my view: it’s time to take profits in SXL and today I am going to recommend you consider investing in another “old media” stock where I see the potential for strong total returns over the next few years.
My fund, the AIM Global High Conviction Fund, had a great quarter, generating a +10% return for the three months. I wrote last week you do need to try and buy on down days and sell on up days, while I also strongly believe you need to occasionally be contrarian in your ideas and buy an out-of-favour stock. That’s what SXL was and that is what APO now is.
APN Outdoor Group (APO) operates outdoor advertising in Australia & New Zealand. I’m sure all of you drive past, or ride a train past, an APO sign every day. You will see the letters APN on the corner of the sign.
This is a classic example of one of those investment ideas you can see with your own eyes in everyday life. As you can all see, these outdoor advertising signs, particularly the ones on major motorways and train stations, are transforming from “static” single advertisement signs to “smart signs” that can project a variety of digital content and dramatically increase the yield of the given sign.
Of course, many of you will be saying, “Hang on Charlie, isn’t this the stock that fell -35% in a day after reporting disappointing earnings and downgrading its guidance?”. Yep, this is the one, but my strong belief is that the fall in APO shares is an excellent opportunity in what will prove a structural growth company in a structurally growing sector. I genuinely believe the guidance downgrade was a one-off and the share price fall a gross over-reaction.
APO share price chart: Up by the stairs, down by the elevator.
However, if I then overlay APO’s share price and consensus earnings per share forecasts for APO for FY17, you can see the share price has fallen dramatically harder than EPS forecasts have been downgraded. In other words, the stock has experienced a P/E de-rating.
To confirm the FY17 P/E de-rating, the chart below illustrates that the forward P/E has dropped by 5 P/E points to 16.1x
The pullback to a P/E of 16x earnings suggests the market believes the structural growth story is broken or that consensus earnings are cum further downgrade. I think neither assumption is correct. In fact, I believe quite the opposite: that being the structural growth story is intact and consensus earnings are more likely too conservative and cum upgrade through time.
While the guidance downgrade that de-railed the stock was about the half we are currently in, it’s worth remembering outdoor advertising bookings were interrupted by a series of one off events, most notably the Olympics and the Federal Election. History suggests bookings recover in the next quarter after these events and I don’t think it will be any different this cycle around.
That is why I strongly believe this has a “cyclical blip” for APO not a structural change event.
Overall, outdoor advertising demand should improve from here. According to UBS analysis, “we see a few reasons why earnings growth should return in 1H17”.
- Overall market demand should improve post a weaker Q4 impacted by the Olympics.
- APO will cycle a period where only four new digital boards were constructed (vs 20-25 to be rolled out over the course of CY16).
- APO should benefit from additional earnings contributions from the Metrospace and Iom acquisitions.
- APO will cycle a weak performance in New Zealand.
- UBS factors in 7% revenue growth and +15% ebitda growth in FY17
USB also says “ We think the structural growth story for outdoor remains intact”.
- We seem room for outdoor to grow its c5% share of Australian media ad spend (UK 5.5%, US 4.7%)- particularly against a backdrop of continuing free-to-air (FTA) TV audience declines and outdoor audience growth.
- Recent industry momentum remains robust at +20% year-on-year.
- Historic precedents strongly suggest the current APO dip will be transient.
Now let’s look a little more specifically at APO. The table below confirms APO was a structural growth stock in a structurally growing industry.
I think these digital screens are a game changer for the outdoor advertising industry and also highly effective for advertisers. I’m sure when we are all stuck in traffic or waiting for a train/plane that we actually watch these digital billboards and their changing content. I actually enquired about a small car I saw advertised on an APO digital billboard last week which confirmed to me the effectiveness of this advertising format.
APO is a lowly geared company, net debt is around $50m. All other investment metrics are very solid too.
The CY17 year is the one I am invested in. If the forecasts above prove accurate APO shares will trade at a higher price. The stock could easily return to its previous 20x P/E and on CY17 forecast that would equate to a $6.80 price target.
We didn’t own APO shares before the big sell off, we accumulated them in the aftermath and have bought shares as high as $5.50 recently. It is now a solid position in our fund as we wait for our investment thesis that this was a “one-off” event to play out over the next 18 months.
It’s also worth noting that the James Packer backed Ellerston Capital recently filed that they had purchased 10,582,634 APO or 6.35% of the company. Ellerston Capital has a very good track record in mid-cap Australian industrial stock picking and I was encouraged to see them emerge on the register of APO.
In summary, if you made money on my SXL recommendation I suggest you consider APO as somewhere to reinvest the proceeds.
This APO idea is not a “trading idea”. This is a contrarian investment idea.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.