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ITV - Another special dividend, but outlook remains uncertain

George Salmon | 1 March 2017 | A A A
ITV - Another special dividend, but outlook remains uncertain

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ITV plc Ordinary 10p

Sell: 120.80 | Buy: 120.90 | Change 0.60 (0.50%)
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Revenue and profits at ITV increased by low single digits over 2016. As the group had previously disclosed, political and economic uncertainty is impacting advertising revenues, but the impact on Q4 is slightly less than had originally been expected. The full year ordinary dividend is increased 20% to 7.2p, with a 5p special dividend too. The shares rose 2.2% on the news.

Our View

CEO Adam Crozier has changed the balance of ITV in recent years. A string of earnings enhancing acquisitions has bolstered the size of ITV Studios, which makes and sells programmes such as The Voice and Hell's Kitchen. With over half of Studio revenue generated overseas, and a shade over 50% of group profit now derived from non-advertising revenue, ITV is certainly less exposed to UK advertising trends than it once was.

However, it can't be ignored that 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. ITV is already feeling the effects of reduced spending as worries over the UK economy take hold. This trend would likely strengthen if these fears become reality, but its increased diversification and stronger balance sheet should mean the group is better placed than at the time of the last downturn.

In the longer term, another challenge comes from adapting to the changes modern technology have brought. ITV is by far the biggest ad-based venue to draw in a mass audience, but longer-term 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. It's good to see the group prioritising investment in its digital capabilities.

Going forwards, we can expect more bolt-on deals to grow the Studios division, but there is always the potential for something bigger too. ITV was recently in the market to buy Peppa Pig owner Entertainment One. The group will need to find the right deals, at sensible prices. At the moment, the shares trade on a price to earnings ratio (P/E) of 12.4 times expected earnings, almost 20% below their historic average, and offer a prospective yield of 4.4%.

Full year results:

Total external revenue (which strips out the effect of internal supply) rose 3% to £3.1bn. Group adjusted earnings before interest, tax and amortisation (EBITA) increased 2% to £885m.

EBITA in Broadcast & Online was £642m, down 3%. Revenue fell 1% over the year, with a 3% decline in Net Advertising Revenue (NAR) partly offset by 23% growth in the smaller Online, Pay & Interactive division. The group says advertising budgets have been impacted by wider political and economic uncertainty in recent months. In the fourth quarter, NAR fell by 6%, marginally less than the group had expected.

ITV Studios EBITA of £243m was 18% up. Revenue increased 13%, boosted by foreign exchange movements and the group's acquisitions over the year. On an organic basis, revenue fell 3% as two shows in America did not get recommissioned, and the phasing of Hell's Kitchen, which did not feature in 2016 but is returning for two series in 2017.

Looking ahead, the group expects NAR to be around 6% down over the first four months of the year, but expects to outperform the wider market. ITV Studios is expected to deliver good organic revenue growth. 2017 EBITA is thus expected to be broadly flat on 2016.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.