This week, the spotlight falls on APN Outdoor (APO), which you may recognise from the model portfolio. As the name suggests, APO is an outdoor media company providing media agencies with a range of campaign options, from billboards, to railway stations, buses and airports. APO’s performance has been volatile to say the least since listing in late 2014, having tripled from the IPO price, peaking at $8.00, and settling more than a year later in the range of $4.50-$5.00.
This incredible share price journey can be explained by volatile market expectations more than volatile business conditions, but both have played a part. In addressing these drivers, it is important to understand what is principally attractive about APO as a business.
First and foremost has been its growth outlook, driven by outdoor media’s growing share of total ad spend in Australia. This in turn has been driven by digitisation of channels such as billboards. Digitisation has allowed for better asset utilisation, faster campaign turnaround, and more nimble and targeted execution. This, coupled with outdoor’s growing audience, have made it an attractive alternative to traditional media such as TV and print, which have declining audiences. That being said, APO has a unique challenge within its business in that 30% of its earnings are derived from the ‘transit’ channel (bus and tram exteriors), which (at least at the present time) cannot be digitised. As the market came to realise this, it was forced to rebase its expectations for medium term growth, and hence the stock de-rated.
There were also concerns that the management team, once thought to be a strength of the business, had become distracted due to a costly failed merger with primary competitor oOh!Media (OML). Soon thereafter, long-time CEO Richard Herring announced his retirement, and it became clear that APO was ready to refocus under new leadership.
Yet, this is to say nothing of the fundamental quality evident within the business. Through prudent negotiation with landlords, and by leveraging its leading billboard portfolio, APO has built a strong moat that shines through in its superior margins. This drives a higher sustainable ROE for the business despite being the least leveraged (indebted) of its peers. Also noteworthy is how stable its ROE has been since listing, despite an inherently cyclical earnings base.

Figure 1. APO NROE summary
Source: StocksInValue
Also impressive has been APO’s cash flow, which, at 132% of NPAT since listing, has supported reported profit. This is an important point to make, and it is an important feature we look for in most businesses. If cash flow does not support earnings, ROE may be overstated, and hence the valuation may be too high. Also gleaned from the ‘key stats’ summary is that growth has been self-funded since listing, with no new share capital and only a moderate increase in debt relative to earnings.

Figure 2. APO key stats
Source: StocksInValue
In our view, at current prices APO offers good value. We believe the market is too focused on the company’s short term disruptions in what has been a challenging year for advertising as a whole. In stronger years, APO’s growth, supported by ongoing structural tailwinds in the outdoor segment, will be better. Exciting new initiatives to drive growth in transit and in the small but rapidly expanding New Zealand market, may also bear fruit in the next 12 months. We see APO as a fundamentally strong but cyclical company which carried outsized expectations that it did not live up to. With the market finally understanding the business and its drivers, we would expect much more rational performance from the stock going forward. For it to trade closer to its valuation, it will need to prove its business remains healthy and growing.
 
Clime Asset Management owns shares in APO