Investors in outdoor advertising companies should be very wary of getting their fingers burnt if the UK market is a reliable indicator of the sector’s likely performance in coming years.
Private equity player CHAMP listed out-of-home firm oOh! today having raised $166 million. It boasted a $289m market cap on debut based on a valuation multiple of 13 times earnings.
The listing comes as its nearest peer APN Outdoor treads water, with the stock trading at around $2.50 after listing at $2.55.
In the short term, this could be a sign that Australia’s IPO market bull run is beginning to lose momentum.
But don’t bet on the stocks delivering a solid return in the medium to long term.
The investment thesis trotted out by the advisers and rows of bankers working on both floats posits huge upside potential based on the structural shift from paper and glue to digital billboards.
A decade ago, the major outdoor players in the UK were confident they would attract new advertisers thanks to improved impact, versatility and targeting.
It’s a compelling argument, but 10 years on from the initial digitalisation of outdoor billboards in the UK, the sector has failed to significantly lift its share of the advertising pie.
While it’s impossible to quantify the impact of outdoor digitalisation in the UK as we do not know what would have happened otherwise, the only certainty is that it has helped to sustain the sector’s share of advertising dollars.
But this is no free lunch. Because the capital required to erect digital signage is expensive, operating costs for outdoor operators have increased.
When the London Underground awarded a new outdoor advertising contract, no one foresaw the frequent power failures as contractors struggled to install new digital displays on the capital’s dilapidated transport system.
Over the long term, the lunch gets more expensive, as the best sites get digitised first, and competition rises as the rewards fall.
Anyone who is a frequent travelling to London’s Heathrow Airport will have noticed there is an ever-increasing amount of digital screens alongside the A4 motorway into West London.
In his recent forecast on the UK outdoor media sector, WPP’s respected Futures Director Adam Smith was bearish in his outlook, predicting growth of 4 per cent.
“Digital occupancy rates appear to be levelling off, and date and time premiums are falling at last,” Smith said.
In fact, outdoor’s share of UK advertising expenditure fell from 6.0 per cent to 5.5 per cent this year.
Back home, outdoor’s share of the Australian media sector is predicted to remain flat at around 4.4 per cent next year, according to WPP, the world’s largest advertising group by sales.
On the upside, the cost of the technology falls over time, and advertisers will be drawn to sophisticated technology like NFC, QR codes, Bluetooth, and face and expression recognition as outdoor becomes a ‘mobile’ channel in itself.
But this is a long way off, and it remains to be seen if these technologies can generate large revenues in the fierce fight for advertising dollars.
Potential outdoor investors should pay heed to the response from a raft of media companies approached about a trade sale. The Seven and Nine networks, French billboard giant JCDecaux, and News Corp, ultimate publisher of The Australian, all walked away before CHAMP settled on an IPO.
This article first appeared in The Australian. Reproduced with permission.