Back in December 2018, I explained on this podcast with Matt Joass and Andrew Page that I was short a stock called oOh!media (ASX:OML) as a hedge, since it is a poor business that is highly leveraged to the Australian economy. 

Today the share price has fallen 25% on a big downgrade to its guidance. Let's take a look at the numbers to see if the short thesis has now played out.

The company has disclosed that it had underlying EBITDA in the first half of $56 million. It claims that over current year it will magically release $16 million in synergies that it has been unable to release in already. Annualising the first half underlying EBITDA, and adding the magical synergies, we get an underlying magical EBITDA for 2019 of a bit under $130 million. This is in line with their guidance of $125 million to $135 million.

Offsetting this, the company has forecast capital expenditure of $55 million - $70 million. Last year operating cashflow was about $70 million against underlying EBITDA of $110 million, so if we are generous we could model operating cashflow of perhaps $100 million in FY 2019. Adjusting for the forecast capex, we thus have an (extremely generous) free cash flow forecast of about $55 million.

At a share price of $3 OML has a market capitalisation of $717 million. It last disclosed net debt of $372 million, so the enterprise value is almost $1.1 billion. Against a reasonable free cash flow forecast of $55 million.

That means the FCF / EV is almost 20. 

Even those who were pushing the stock above $4 (presumably) admit it is cyclical, and this guidance at least implies it is on the wrong side of that cycle. I've no doubt in the world that today's buyers are "looking through" the cycle and seeing some magical future where a company with zero moat is able to maintain high margins. Of course, the truth is that there is no shortage of outdoor space for advertising and any exceptional profits accruing to exceptional locations will eventually accrue to the property owners.

Whether or not the Ooh Media share price beats the market from here, I do not see any rational argument that it can provide good risk adjusted returns. The utility of the stock is as a hedge against an economic downturn. It is true that the company is a real business that will probably still be around in many years, but the chances of exceptionally good returns are nowhere near high enough to compensate for the very real risk that investors suffer exceptionally bad returns, based on factors the company cannot control.

In my view he stock is still overvalued, once adjusted for the risk of economic slow down in Australia. As I said at 34 min in the aforementioned podcast: "Ohh Media is a bad stock and I would not own it for anything, Disclosure: I am short".

Disclosure: Claude Walker is short Ooh Media, increased his short position earlier this morning, and will not close his short position (but may increase it) for at least 2 days after the publication of this article.

This article does not take into account your individual circumstances and contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.