oOh!media earnings slump tests I Squared’s $900m takeover bet

oOh!media has reported a sharp fall in first-half earnings as higher rents on new advertising contracts weighed on margins, complicating the picture ahead of its proposed near-$900 million takeover by I Squared Capital.

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Revenue increased 1.4 per cent to $340.9 million in the six months to June. However, adjusted underlying EBITDA fell 23 per cent to $48.1 million, from $62.2 million a year earlier.

What drove oOh!media’s earnings decline?

• Adjusted underlying EBITDA fell 23 per cent to $48.1 million.
• Adjusted underlying profit dropped 42 per cent to $15.4 million.
• New Australian contracts added $21.5 million in revenue.
• Fixed rents increased by $17.4 million.
• Australian third-quarter revenue is pacing 14 per cent higher.

The result comes as I Squared Capital moves to acquire the outdoor media business under a $1.70-a-share offer, including a fully franked two-cent interim dividend.

oOh!media’s adjusted gross margin slipped to 37.5 per cent from 41.8 per cent. The company attributed much of the pressure to higher fixed rents associated with recently secured contracts and new digital sites before those assets reached their expected revenue contribution.

New contracts lift revenue, but rents bite

Revenue from new Australian contracts increased by $21.5 million, supported by assets including Transurban, Melbourne Metro Tunnel and Waverley. That growth was partly offset by a $4.5 million decline across organic contracts.

Fixed rents rose by $17.4 million due to new agreements and annual increases across the existing network. Australian revenue still grew 5.5 per cent, broadly in line with the wider out-of-home advertising market.

oOh!media said the outdoor market grew 6.3 per cent during the half. The medium reached a record 16.9 per cent share of agency media spending, based on Standard Media Index data cited by the company.

Billboard revenue declined 2 per cent to $117.5 million as softer demand affected brand-led categories. Street and Rail revenue rose 3 per cent to $111.6 million, while Airports increased 5 per cent to $33.6 million.

Retail revenue was up 1 per cent to $59.2 million, recording its first first-half increase in six reporting periods. Office and Study revenue increased 7 per cent to $10 million.

New Zealand continues to weigh on the group

New Zealand revenue fell 47 per cent following the expiry of oOh!media’s Auckland Transport contract last October. The loss of the contract led to a $9.7 million decline in gross profit, while oOh!media’s broader New Zealand reset had a $9.4 million impact on adjusted gross profit.

The company’s statutory loss narrowed to $1.2 million from $11.3 million a year earlier. The previous period included a $30 million impairment against the New Zealand business.

Q3 recovery carries more weight

James Taylor, chief executive of oOh!media, said the business had continued reshaping its operations despite the takeover process beginning in April.

“While the bid process was underway since late April, the business managed to navigate challenging first-half conditions for the advertising market and has delivered on our commitment to reshape oOh! for our next phase of growth. We are beginning to see the fruits of the decisions we have made,” Taylor said.

oOh!media said Australian third-quarter revenue was pacing 14 per cent ahead, with Automotive, Communications and fast-moving consumer goods among the stronger categories.

“We expect a materially stronger second half and momentum is accelerating, with third quarter revenue pacing up double-digits, and more than 100 per cent of last year’s closing Australian Q3 revenue already booked,” Taylor said.

The company has also removed $12 million in annualised operating costs and capital expenditure through its Operational Excellence program and the exit of its reo retail media business.

Cash flow and debt under pressure

Adjusted operating cash flow fell 16 per cent to $40 million, while free cash flow declined 35 per cent to $15.2 million. Net debt increased to $129.3 million from $112.8 million at the end of December.

Lease liabilities rose by $60.6 million to $996.8 million. The interim dividend was reduced to two cents a share from 2.25 cents a year earlier.

The stronger third-quarter bookings now put the focus on whether oOh!media can convert revenue growth into improved margins. That performance will be closely watched as I Squared prepares to take control of one of Australia’s largest out-of-home advertising networks.