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ITV - On course for strong growth

Steve Clayton | 10 November 2015 | A A A
ITV - On course for strong growth

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ITV plc Ordinary 10p

Sell: 120.65 | Buy: 120.75 | Change 0.45 (0.37%)
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ITV's 9M trading update shows external revenues up 13%, with Broadcast and Online revenue up 7% to £1,528m and Studios revenues up 28% to £782m, 9% of which was organic. The company forecasts ITV Family Net Advertising Revenue (NAR) to be up at least 5% for the full year, ahead of the market. The company say that the full year outcome will be another year of strong double digit profit growth and that the initial outlook for 2016 is encouraging. ITV shares rose by approaching 2% on the back of the results.

Within the Broadcast and Online division, revenues accelerated in Q3 with 8% overall revenue growth. For the nine months, Online, Pay and Interactive revenues are up 29%. Share of viewing grew, supported by Soaps, Daytime and the Rugby World Cup, despite the teams' performance. The group recently announced the acquisition of UTV (Ulster), further unifying ownership of the network.

Recent acquisitions by the Studios business are said to be performing well and organic growth is strongest in the US and Global Entertainment markets. Aquarius and The Good Witch have both been recommissioned in the USA, whilst at home, new series of Poldark and Unforgotten are returning. New UK drama includes Beowulf, Jericho, Victoria and Tutankhamun.

Share of Viewing was down 3-4%, as was the Share of Commercial Impacts. The ITV family still achieves over a third of all commercial impacts in the UK.

The company raised EUR600m via a 7-year Eurobond in September, at a coupon of 2.125%, which will be used to fund the Talpa Media acquisition announced in April. Net debt fell by £15m to £525m in the third quarter. The pension deficit declined by £65m to £220m in Q3 and a new deficit funding plan agreed with the Trustees will see ITV's contributions to the main scheme fall by £10m p.a.

Chief Executive, Adam Crozier said: "We are confident of further good growth across ITV for the remainder of this year and into 2016 as we continue to exploit our integrated producer broadcaster model in the UK and to build a global content business of scale."

Our view:

ITV shares are up about 20% so far this year, driven by a near-constant stream of profit upgrades. These have been driven by an improving advertising outlook and a string of earnings enhancing acquisitions of production studios. The acquisition of Talpa brought John de Mol onto the ITV team. He founded Endemol which went on to develop the Big Brother reality franchise. He is now committed to staying with Talpa, within ITV, for years to come.

ITV looks to be in a good position; its balance sheet is sufficiently strong to keep funding the acquisition of new production houses. That gives more content to use at home and to sell abroad. Earnings are enhanced by the deals, and ITV becomes less dependent on terrestrial advertising revenues, which are still the most important source of income for the group. Already, ITV is the largest independent production house in the USA. The company intends to push borrowing to around 1.5x earnings before interest, tax and depreciation, if it can find the right deals. That suggests it could spend a further billion pounds or more .

If ITV can find the right deals, at sensible prices, then it could grow even faster than the market consensus currently predicts. Expectations are for sales to rise from £2.6bn last year to £3.3bn in 2017, with earnings per share forecast to increase by over a third over the same period.

The shares trade on a price to earnings ratio (P/E) of 16.3x, falling to 13.7x two years later, on consensus forecasts. The dividend is also an attraction. The shares yield 2.8% for 2015, rising to 3.7% in FY17 on current analyst estimates, although please remember dividends can vary and are not guaranteed. We highlighted ITV as one of our stocks to watch in 2015 and so far it has delivered. The group is trading well and we remain confident in its long term prospects.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.