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ITV - Advertising challenges remain, Studios still growing

George Salmon | 14 November 2017 | A A A
ITV - Advertising challenges remain, Studios still growing

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ITV plc Ordinary 10p

Sell: 150.40 | Buy: 150.50 | Change -2.00 (-1.31%)
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ITV's revenue rose 1% to £2.5bn in the 9 months to 30 September, although after stripping out inter-divisional deals of £347m, revenues fell 1%. Continued growth in ITV Studios, where revenues rose 9% to £1bn was more than offset by weakness in Broadcast & Online, where revenue fell 4% to £1.5bn.

The shares fell by 1.4% on the news.

Our view:

In May, Adam Crozier announced his decision to step down as chief executive. His replacement, former Guardian and easyJet CEO, Carolyn McCall, will step into a very different business to the one Crozier himself took charge of in 2010.

The balance sheet looks stronger, while a string of bolt-on acquisitions has bolstered the size of ITV Studios, which makes and sells programmes such as The Voice and Hell's Kitchen. Going forwards, the challenge is to find the right deals at sensible prices.

On the flip side, ITV itself has been mooted as a target. However, the obvious buyer, Liberty Global (which owns just shy of 10% of the group already) has distanced itself from such a move.

The growth of the Studios business, where more than half of revenues are generated overseas, means ITV is less exposed to UK advertising trends than it once was. However, a big chunk of profit still comes from selling advertising space.

Since this falls under discretionary spending for many businesses, budgets tend to wax and wane with the fortunes of the wider economy. Brexit-induced doubts are lingering, so ITV's customers are tightening the purse strings. This presents a challenge for the new CEO.

She will also need to be ready to adapt the group to the changes modern technology has brought. ITV remains the biggest commercial venue to draw in a mass audience, but it looks like viewing habits are moving towards a more on-demand set up.

This brings the group into competition with Amazon and Netflix, two pretty bruising rivals with deep pockets. Providing entertaining content is obviously essential, but building a slick, competitive platform could be just as important.

The shares trade on 9.7 times expected earnings, around a little over 30% below their historical average, and offer a prospective yield of 5.8%.

Q3 Trading update

Within Broadcast & Online, Net Advertising Revenue (NAR) is down 7% year to date, to £1.1bn. The group says some consumer goods and supermarkets are returning to TV advertising, although corporate confidence continues to be impacted by political and economic uncertainty. For the year as a whole, NAR is expected to fall 5%.

Online, Pay & Interactive revenues are up 8% so far this year, with online viewing up 41%. ITV continues to invest in the Hub service, while Britbox, which supplies US residents with British TV, is said to be performing well.

ITV1's share of viewing is slightly ahead this year, at 15.3%, with all ITV channels at 21.5%.

Studios delivered good underlying growth across all parts of the business, with ITV America an area of particular strength. Acquisitions continue, Italian producer Cattleya and UK entertainment start-up Koska added during the quarter. The group is confident ITV Studios will deliver good organic revenue growth, with profit broadly flat this year.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

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