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OOh!Media Can Do Well If It Can Grow Sales and Cut Costs

Australian advertising company oOh!Media Ltd. (ASX:OML) specializes in marketing. Much of what the company does is billboards and outdoor media at airports and other public places. Sales have grown, but earnings have not kept up. I decided to look into this small-cap stock because I was curious as to why the Oakmark International Small Cap Fund bought shares.

The stock trades in Australia for 3.80 Australian dollars ($2.61). There are 240 million shares and the market cap is AU$912 million. Earnings are 8 cents and the price-earnings ratio is 43. The dividend is 11 cents and the dividend yield is 2.89%.

Sales have grown from AU$334 million in 2016 to AU$595 million over the last 12 months. That's growth! Unfortunately, earnings have not kept up. Earnings have grown from AU$21.6 million to AU$22.8 million over that period. Also, shares outstanding have crept up, growing from 160 million to 240 million over that time frame.

The revenue breakdown for 2018 was: 14% Commute, 32% Road, 27% Retail, 14% Fly, 9% Locate and 4% Other. The Road division is billboards, which oOh is number one in Australia. Retail involves ads that you see in shopping malls. Flight is the ads that you see inside of airports. OOh also manages the advertising that you see on Quantas flights. Locate is advertising in coffee shops and buildings. The Commute division handles advertising that you see at bus stops and places of that nature.

From the Prospectus, when oOh! was taken public again, some of the clients included: McDonald's (NYSE:MCD), Nestle (XSWX:NESN), Audi (XTER:NSU), Nissan (TSE:7201), Coca-Cola (NYSE:KO) and dozens of other large, multinational corporations.

In the half-year report, revenue jumped from AU$192 million to AU$304 million. Ebitda jumped from AU$36 million to AU$135 million, but earnings fell from AU$9.2 million to AU$515,000. Gross profit margins were 41.5% and Ebtida margins were 18.4%. The balance sheet shows AU$39.3 million in cash and AU$117 million in receivables. The liability side shows AU$88 million in payables and AU$432.7 million in debt. A little heavy on the debt side in my opinion. Free cash flow was AU$62.5 million for the half.

From 2015 to 2018, the stock traded in the AU$3 to AU$4 range and earnings were 12 cents to 19 cents. The stock often trades at a price-earnings ratio in the 20s. Management expects Ebitda to be in range of AU$138 million to AU$143 million in 2019.

I found the stock by perusing Oakmark Interntional's holdings. HMI out of San Francisco holds over 10% (in 2018). Yarra Funds in Australia owns over 9%. I tried to contact Oakmark to ask why they purchased, but couldn't connect. I also tried to get through to oOh! but probably due to the time exchange, wasn't successful. My guess is that Oakmark sees some reason that sales will rise.

The company started off life as Network Ltd. and was listed in Australia in 2002. In 2012, the company was taken private by Champ Private Equity and WWP. In 2014, the company again went public. In June 2018, oOh!Media purchased street furniture business Adshel for AU$570 million. There have been several other acquisitions along the way. In 2017, oOh! planned to merge with rival outdoor advertising company APN Outdoor (ASX:APO), but both sides cancelled their plans due to preliminary concerns from the Australian Competition and Consumer Commission. Brendan Cook has been CEO since he founded the company in the late 1980s.

2017 was a blowout year for oOh! Revenues were up 13%, gross profit was up 21%, Ebitda grew 22%, earnings per share increase 26% and the dividend rose 7%. The stock followed suit.

In August, the oOh! and its shares took a beating. Management estimated that earnings would be AU$27 million in the second half--17% lower. The share price touched AU$2.32. Cook blamed the billboard business. A portfolio manager sold off his shares, noting that the costs are fixed in outdoor advertising, so when there is a loss in sales, it goes straight to the bottom line.

I have no idea how the wildfires in Australia will affect oOh! I've been to Australia twice and can tell you that it's extremely dry, as you might imagine. Just a few miles into the interior and it gets incredibly hot and dry.

I wanted to write on oOh! because there is not a lot of information out there. It's a high-profit business and I was curious to see why Oakmark bought shares. If the company can grow sales and cut costs, then the stock should do well.

Disclosure: We do not own shares.

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This article first appeared on GuruFocus.