Despite weakening ad markets, Goldman Sachs believes this stock is a Buy

Goldman Sachs has reiterated its BUY rating for Australian outdoor and online advertiser oOh!media (ASX: OML) in a research note on Tuesday, with a price target of $1.70.

Using a closing price of $1.54, this reflects a total return of 10.4%. 

As at 11:15am (AEST) Tuesday 21 February 2023, OML’s share price was trading at $1.55, with shares were up 0.3% in the second hour of trade. 

Brief overview

oOh!media gets its name from an industry term—Out Of Home (OOH) advertising. 

With a fleet of digital billboards and similar products around Australia, OML was badly hit by the COVID-19 lockdowns with less foot traffic on the streets ultimately translating to less revenue.

To illustrate that impact, consider the below: 

• OML hit an all time high of $4.31 on 29 July 2016

• On 31 August 2018, it hit $4.28 

• By 31 December 2019, the price was at $2.96 

• One month into COVID-19 (March 2020), the price was $0.64

• On 29 October 2021, it was at $1.81 

• Today, it’s trading at $1.54

On the back of OML’s latest financial report, however, Goldman Sachs has boosted its revenue growth expectations for FY23 by 7.8% 

In addition, CY23 EBITDA estimates for OML were upgraded with the broker expecting an increase of 3-4%. 

Quick bite: Why is Goldman Sachs bullish? 

There are four reasons why the broker believes the stock is a buy: 

1. Goldman Sachs expects to see audience recovery continue post-COVID 

2. The broker also expects businesses to begin ramping up ad spend again, after a recovery in 2021 was cut short by a risk-off 2022 

3. Goldman Sachs forecasts OML will continue to grow revenue yields from AdTech offerings (online advertising)

4. Improving performance metrics as OML starts to benefit from a post-COVID world, nearly four years on

Key risks include ‘sticky’ continued weakness in ad markets and lower contract values from customers who are getting less bang for their buck in terms of impressions and engagements.

Why the current share price is an attractive entry point 

“With OML having had significant momentum prior to COVID (outgrowing the total ad market for the prior 11 years)...we are Buy rated on OML, seeing the current share price weakness as an attractive valuation entry point,” analysts wrote. 

The investment bank also highlighted recent “cost discipline” measures demonstrated by the company, with OML management targeting margin expansion, and “modest growth in FY23 OpEx.” 

That OpEx growth, Goldman Sachs states, is driven by wage increases. The investment bank expects OpEx to climb 5.5% across 2023.

The broker expects the industry to continue growing in terms of total ad market share through 2023 (analysts highlighted market share was larger in 2019 than it was in 2022). 

“Overall we put through EBITDA upgrades of +3% to +4% driven by disciplined OpEx management…offset by a marginally more cautious top-line (given macro). Stay Buy,” analysts wrote.

OML's five year charts show the impact COVID had on returns