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ITV - advertising outlook still weak

George Salmon | 10 May 2017 | A A A
ITV - advertising outlook still weak

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ITV plc Ordinary 10p

Sell: 124.15 | Buy: 124.25 | Change 0.20 (0.16%)
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ITV's first quarter trading update saw shares dip 1.4%. Full year guidance is maintained, but trading in the 3 months to 31 March was marginally behind prior expectations.

Our View

Outgoing CEO Adam Crozier has changed the balance of ITV. A string of 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, 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 wider economy. ITV is already feeling the effects of reduced spending, as worries over the future of the UK economy take hold. This would likely worsen if these fears become reality, but its increased diversification and stronger balance sheet should mean the group is better placed than before the last downturn.

A longer-term challenge for the new CEO will be adapting to the changes modern technology has 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 in 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.

The shares change hands for 12.3 times expected earnings, around 20% below their historic average, and offer a prospective yield of 4.1%.

First quarter trading

Group external revenue has dropped 3% to £731m, with the 6% decline in Broadcast & Online revenue more than offsetting 7% growth from the smaller Studios division. Studios was boosted by a good performance from ITV America and the benefit of weaker sterling.

Within Broadcast & Online, Net Advertising Revenue (NAR) from ITV channels is down 9%. This drop was anticipated, and is a function of weaker advertising spending. ITV's channels increased their collective share of viewing from 21.3% to 21.7%. Revenue from the Online, Pay & Interactive division is up 12%, driven by 22% growth in online advertising.

Looking ahead, NAR is forecast to be down 8% to 9% against H116, which included the Euros football. First half profits will be impacted by the timing of payments in ITV Studios, but the group is confident the division will report good organic revenue growth for the year as a whole. Over 75% of expected full year revenue in Studios has already been secured.

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.