Post-COVID recovery stocks have had a nice run the past 6 months. So much so that many are now above their pre-pandemic highs, making them fairly expensive.
But one fund manager reckons he's found a cheap ASX share that's yet to realise its potential.
"We have screened the small caps universe for tactical opportunities within the later-stage (recovery) cohort which still offer earnings and valuation upside potential," said Montgomery portfolio manager Dominic Rose.
"A clear standout here is outdoor media company, oOh!Media Ltd (ASX: OML)."
oOh!Media is a provider of 'out of home' advertising.
"The company reaches 77% of the metropolitan and regional population via an extensive network of circa 37,000 digital and static asset locations," Rose said.
"These include roadside billboards, retail shopping centres, offices, bus stops, train stations and airports."
How COVID-19 killed oOh!Media's business
The pandemic last year completely floored the outdoor advertising market.
"COVID-19 absolutely hammered the out-of-home sector, far worse than most other forms of media, with audiences significantly declining due to initial lockdowns and mobility restrictions," said Rose.
"Advertisers pulled outdoor campaigns and redirected what was left of their budgets towards viewers stuck at home in front of the telly."
oOh!Media suffered a painful 62% reduction in year-on-year revenue for the quarter ending June 2020.
"Faced with a rapidly evolving and highly uncertain near-term outlook, management took the decisive steps to materially reduce operating costs and strengthen the balance sheet," said Rose.
Outdoor ads will roar back
Rose is optimistic about oOh!Media's recovery as he's certain outdoor ads will make a comeback as Australia adjusts to post-coronavirus life.
Earnings would recover to pre-pandemic levels next year, he suspects.
"Clear upside potential for the business exists as workers eventually return to offices and borders reopen to facilitate a travel sector recovery," Rose said.
"We also see OML as well positioned to benefit from the strong domestic macro backdrop which should drive higher advertising rates across all formats as big advertisers like banks and auto come back into the outdoor market."
The best thing is that the fund manager is convinced the market has not yet fully realised the ASX share's comeback potential.
At the market close on Tuesday, oOh!Media shares were down 0.58%, trading at $1.71. That's only 5.2% up from the start of the year.
"Valuation looks too cheap to us. The stock is trading on 7.5x recovered EBITDA (2022) which compares to OML's historic average of 10x to 12x and the broader small cap market on 11x," Rose said.
"We see potential for the stock to rerate towards 10x as confidence in the earnings recovery builds."
That's a 33% upside that the Montgomery Small Companies Fund is betting on.
Rose admitted the recent lockdowns in Sydney and Melbourne have been a setback for the ASX share.
"However, successful vaccination programs in countries like the US and the UK provide confidence in the medium-term outlook."
