JCDXY - JCDecaux: I'm On The Sidelines Until The Cash Flows Improve

2023-08-04 07:00:00 ET

Summary

• JCDecaux is a global outdoor advertising company with a strong presence in Europe.
• The company's financial results in the first semester showed promising revenue growth, but operating expenses increased at a faster pace.
• JCDecaux has made acquisitions in Italy and Spain and is hoping for a recovery in air travel to boost its revenue.

Introduction

JCDecaux ( JCDXF ) ( JCDXY ) is a French company specialized in outdoor advertising . Virtually every airport, train station or other hot spot where people gather will have one of their advertisement billboards or panels. The company has 380,000 advertising panels in airports and stations, and an additional 1 million-plus advertising panels all over the world in over 3,500 cities in excess of 10,000 inhabitants. Almost 60% of its revenue is generated in Europe which means the company still has the ability to expand into other areas of interest.

JCDecaux is a French company and has its primary listing on Euronext Paris where it's trading with DEC as its ticker symbol . The average daily volume is around 70,000 shares, which represents a monetary value of approximately 1.2M EUR per day. The company reports its financial results in Euro and is also listed in Euro, so the EUR will be the base currency throughout this article (unless indicated otherwise).

JCDecaux' website contains a lot of 'download only' links, but you can find all relevant information here and here .

A strong organic revenue growth in the first semester, but that doesn't mean the results were good

This article is meant as an update to previous articles. To get a better understanding of JCDecaux' business model and activities, I'd like to refer you to my older articles here and here . In this article, I will predominantly focus on the recent financial performance of the company.

While the total revenue in the first semester showed a promising improvement (there was an increase from 1.37B EUR to 1.47B EUR), the operating expenses unfortunately increased at a faster pace than the approximately 8% revenue growth.

That being said, JCDecaux was able to reduce its depreciation, amortization and provision expenses while it also recorded a boost in the net 'other operating income' which increased from less than 6M EUR to approximately 52M EUR. This included several non-recurring items like the renegotiations of certain street furniture contracts and unfortunately this is a non-cash item (and this will become clear when I discuss the cash flow statement).

Despite the boost from those non-recurring items, the bottom line result was still quite disappointing: after taking the financial expenses of 64M EUR into account as well as the net profit from equity consolidated companies, the net income was just 48.7M EUR. And of that number, only 37.8M EUR was attributable to the shareholders of JCDecaux which works out to just under 18 eurocents per share .

Not impressive at all. And that's why I wanted to check the cash flow statement to see if those results are substantially better.

Looking at the cash flows below, the operating cash flow was approximately 322M EUR in the first semester. This includes a net investment of almost 96M EUR in the working capital and on an adjusted basis, the operating cash flow was 418M EUR. Sounds good but keep in mind we still have to deduct the almost 401M EUR (!) in lease liabilities from that amount. And on top of that, the company spent about 155M EUR on capital expenditures as well.

This means that based on the reported results, JCDecaux had a pretty negative free cash flow result and I'm not sure the company will be free cash flow positive this year.

Keep in mind, JCDecaux continues to strengthen its position in a fragmented outdoor advertising landscape. Earlier this year, the company signed an agreement to acquire Clear Channel Italy for 15.1M EUR and Clear Channel Spain for 60M EUR. The total price tag of about 75M EUR represents an EBITDA multiple of just 6.7 times the LTM EBITDA which appears to be reasonable. The acquisition of Clear Channel Italy has already closed but as the Spanish purchase is a larger one, JCDecaux needs to get antitrust approval to complete the transaction. This means the acquisition of the Spanish division of Clear Channel will only be completed next year.

Meanwhile, there doesn't appear to be any near-term pressure on the balance sheet. While JCDecaux' net debt level is still pretty high at about 1.17B EUR, it has almost 1.5B EUR in cash on hand which would be sufficient to cover all debt repayments until the end of 2028.

This means JCDecaux has plenty of time to improve its financial performance. And while about 2/3rds of its adjusted revenue is generated in the billboard and street furniture segment, JCDecaux seems to have high hopes for its air travel division. The company has plotted its airport advertising revenue against the air traffic recovery and it looks like JCDecaux is hoping the lag will be closed: if air traffic is back at 92% of the pre-COVID era, the company appears to be banking on a further improvement of its air traffic ad revenue from the current level of 80%.

Investment thesis

While I'm not inspired by the financial performance of JCDecaux, I don't immediately think it's a 'sell' as the company likely has a few aces up its sleeve being the world's largest outdoor advertising company. However, the weak earnings and cash flow results indicate 2023 will likely still be tough, and perhaps I should be more bearish on the share price. Any further deterioration in the company's financial performance would result in an increasing net debt which will put additional pressure on the company.

I am on the sidelines. Based on the current valuation of JCDecaux and based on the analyst consensus estimates for 2024 and 2025, I think I can get better returns on my invested cash elsewhere. I like the business model so I will continue to monitor JCDecaux financial performance, but at this moment I am rating the shares a 'hold'.

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