The loss of the Yarra Trams (Melbourne) advertising concession is precisely the reason why we have a no-moat rating on APN Outdoor Group Ltd (APO AU). The group's entire business model hinges on its portfolio of leasehold concessions, and potential contract losses are a perennial risk, with the threat of rivals willing to pass on more benefits to landlords always lurking.

In APN Outdoor's case, the failure to renew the Yarra Trams (Melbourne) concession is particularly notable in two respects. First, the loss will shave off AUD 7 million of annualised EBITDA, equating to around 8% of group total. As such, our earnings forecasts have been cut accordingly, resulting in an 11% reduction in our fair value estimate to AUD 5.00 per share.

Second, the loss of this contract for APN Outdoor comes hard on the heels of the Canberra airport concession loss in August. This is unusual for a company which previously boasted an almost-impeccable track record of renewal success, with the only significant loss over the past 12 years being the Melbourne Airport contract—one that was replaced by Sydney Rail, in 2013, and Sydney Airport, in 2015, concession wins.

This begs the question whether we have been too aggressive in our fair value estimate cut, or too dismissive of the potential for APN Outdoor to replace the Yarra Trams (Melbourne) loss with new ones down the track. However, we prefer to err on the cautious side. This is because, depending on the medium (airport, street furniture, billboards, retail, transport), there are as many as seven major outdoor advertising operators vying aggressively for any contracts that come up for renewal. Indeed, we believe this was the very reason why the two biggest players, APN Outdoor and oOh!Media Ltd (OML AU), pursued their failed merger—a marriage that was meant to rationalise the industry and supercharge the combined juggernaut when it comes to fortifying and growing its concession portfolio.

Still, despite the fair value estimate reduction, shares in APN Outdoor are trading at a 15% discount to our revised intrinsic assessment. There is no shortage of reasons to be bearish on the group, given the latest contract loss, rising competitive intensity and the current CEO vacuum. It also does not help sentiment that the previous CEO Richard Herring sold almost 80% of his shareholding in APN Outdoor just before his departure.

However, the stock is trading at 8.7 times our forecast 2018 EBITDA and 13.8 times our forecast EPS. These are not demanding multiples for five-year EBITDA/EPS CAGR outlook of around 9% based on our current estimates. In the meantime, the stock is yielding 4.5% fully franked on a payout of just over 60%. This is backed by a solid balance sheet with forecast net debt/EBITDA of 1.2 times, even after adjusting for the loss of the Yarra Trams (Melbourne) contract.

Amid the negativity, investors also should not lose sight of the fact APN Outdoor retained the other significant contract which has been a hovering risk, namely, the Metro Trains Melbourne concession. While this is a smaller contract than the Yarra Trams (Melbourne), its renewal follows the retention of the Public Transport Authority of Western Australia rail and billboard contract, the Adelaide Metro contract, and the Sydney Buses contract, all in August of this year.

Finally, we know APN Outdoor and Adshel (owned by HT&E Limited) are the losers of the Yarra Trams (Melbourne) concession from December 2017. However, for whatever reason, the identity of the winning bidder has so far been kept secret. In our view, JCDecaux SA (DEC FP) is the only party with sufficient scale and expertise in the outdoor street furniture advertising space to handle a concession of this size. While its estimated 8% share of the Australian outdoor advertising market is far less than the almost-30% share enjoyed by each of APN Outdoor and oOh!media, JCDecaux's share of the Street furniture sub-category is much more significant given it is the primary focus area for the company and is one in which APN Outdoor and oOh!media are largely absent.

Analyst: Brian Han

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What Landlord Giveth, It Can Taketh Away; APN Outdoor FVE Cut to AUD 5.00 Per Share

The loss of the Yarra Trams (Melbourne) advertising concession is precisely the reason why we have a no-moat rating on APN Outdoor Group Ltd (APO...

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