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ITV - A tougher outlook

George Salmon | 10 November 2016 | A A A
ITV - A tougher outlook

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ITV plc Ordinary 10p

Sell: 120.65 | Buy: 120.75 | Change 0.45 (0.37%)
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ITV - a tougher outlook

ITV's trading update for the 9 months to 30 September 2016 shows total external revenue growing again, but as analysts had expected, the outlook for the rest of the year is for a weaker TV advertising market. The shares moved slightly down on the news.

Our View

Advertising spending falls under discretionary spending for many businesses, so it tends to wax and wane with the fortunes of the wider economy. With the outlook for the UK economy uncertain, ITV will be vulnerable should a recession hit.

That said, Adam Crozier has changed the balance of the business in recent years. A string of earnings enhancing acquisitions has increased the size of ITV Studios, which makes and sells programmes such as The Voice and Hell's Kitchen, to the extent that it is now about the same size as the Broadcast division. This has reduced the group's dependency on advertising budgets.

With over 50% of its revenue generated overseas, the growth of Studios also reduces ITV's exposure to the UK economy. The group has a stronger balance sheet and net debt is lower than at the time of the financial crisis. ITV certainly looks more stable than at the time of the last downturn.

The other main talking point around ITV is the prospects for future acquisitions, having recently been knocked back when trying to buy Peppa Pig owner Entertainment One. But the group will need to find the right deals, at sensible prices.

At the moment, the shares trade on a forward price to earnings ratio (P/E) of 10.3x, around 30% below their historic average. The dividend is also an attraction, with the shares trading on a prospective yield of 5.4% and analysts expecting the payout to tick up in the coming years. Of course, these expectations are dependent on economic conditions.

Third Quarter trading in detail:

For the first 9 months, total external revenue was up 5% to £2.2bn (including currency benefits). Within this, ITV Studios' reported revenue grew 18%, driven by acquisitions and favourable exchange rate movements. Organic revenue fell 9%, although after securing 162 new commissions and 139 recommissions so far this year, the group is confident of a return to organic growth next year.

Broadcast and Online revenue was up 1%. As expected, ITV Family net advertising revenue (NAR) was down 4% in the third quarter, which includes the tough comparative of the Rugby World Cup last year. Share of viewing on the main channel rose 3%, and was flat for the ITV Family.

ITV CEO Adam Crozier says that political and economic uncertainty has increased and the group is seeing more cautious behaviour by advertisers. Looking ahead, although the group expect to outperform the wider market, ITV Family NAR is forecast to be down around 7% in Q4 and down 3% for the full year.

The group is on track to deliver the forecast £25m of overhead cost savings in 2017.

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.