New client investment: APN
This week APN News & Media (ASX Code: APN) was added to clients' Australian shares' portfolios.
APN is a major Australian focused media company with two key business lines: Radio and Outdoor Advertising.
APN has been a major media company for many decades, with a colourful history. However, in recent years has been undergoing significant structural change. In the past, it was Australia’s largest regional owner of newspapers, and the owner of the largest newspaper business in NZ (the NZ Herald). It also had ownership of a rabble of radio and outdoor assets (by way of joint ventures). In the past five years the business has been actively streamlined (with the sale of all print assets, and the buyout of all its JV partners), to now comprise two core business lines.
We are attracted to both Radio and Outdoor advertising and see them as complementary. Both segments have been growing well, as they quickly become the only surviving effective mass media advertising methods in an increasingly digital age.
It is becoming clear that these sectors have been taking market share from Free-to-Air TV and newsprint. We expect this to continue for some time as the “viewers” of these forms of advertising continue to grow (versus traditional media where viewership is declining and fragmenting). As a result, we assess they should be capable of growing revenue at the rate of economic growth in Australia (plus a bit) over the medium term. Currently they are doing better than this.
Additionally, for APN in particular, the prior JV structure has left the outdoor assets (Adshell) unloved and under-invested, and gives the scope for above market growth. This will be assisted by APN's move to match the amount of digital screens that their peer groups have. This will entail quite substantial capital spend, but the returns from this investment are high and long lasting.
Further, APN is advantaged through the unique cross ownership of Radio and Outdoor (which is a strategic advantage over its peers), as it gives the possibility to run highly effective integrated media campaigns (across both platforms). We assess this will be attractive to a number of large advertisers, who are looking for broad, efficient and effective reach.
Today APN has low debt (just over 1x cashflow or debt equal to just 14% of the asset base), has just paid its first fully franked dividend since 2012. It is trading on a P/E of 11.7x its expected profit for 2017 (on what we have paid for it).
APN has the wherewithal to take two good businesses and turn it into one great business, and we look forward to watching its progress over the next few years.