Skip to main content
  • Register
  • Help
  • Contact us

ITV - Advertising revenue down, but Studios up

George Salmon | 26 July 2017 | A A A
ITV - Advertising revenue down, but Studios up

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

ITV plc Ordinary 10p

Sell: 120.95 | Buy: 121.05 | Change 0.75 (0.62%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

ITV has released interim results in line with previous guidance, with total external revenue falling 3% to £1.46bn. With costs remaining broadly consistent, adjusted EBITA (earnings before interest, tax and amortisation) is 8% down to £403m. The shares rose slightly on the news.

Our View

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

The balance sheet looks stronger, while 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 Studios' revenue generated overseas, and a shade over 50% of group revenues now derived from non-advertising dependent ventures, 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 fortunes of the wider economy. With Brexit-induced doubts lingering, ITV's advertising customers are tightening the purse strings in anticipation of tougher times ahead. 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. In that regard, 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, and the group will need to find the right deals at sensible prices. There is always the potential for something bigger too. ITV was recently in the market to buy Peppa Pig owner Entertainment One. 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 shares trade on 11 times expected earnings, around 25% below their historic average, and offer a prospective yield of 4.7%.

Half year results

The decline in external revenue over the six months to 30 June 2017 was driven by a 6% drop in the Broadcast and Online division, where revenues fell to £1bn. EBITA from the division fell 8% to £293m.

While continued growth in the ITV Hub helped revenues in the Online, Pay and Interactive business rise 5% to £112m, ongoing economic and political uncertainty drove advertising revenue (NAR) down 8% to £769m.

On screen, ITV's share of viewing remained broadly level, despite the previous year including the football European championships. Love Island, Britain's Got Talent and the Six Nations Rugby Championships all performed well.

Revenue from ITV's own production Studios business increased 7% to £697m, driven by foreign exchange movements and acquisitions. Excluding these factors, revenue was level with the prior year. EBITA of £110m is down 9%, impacted by ongoing investment and the fact the prior year includes the full benefit of the four year license deal for The Voice of China.

ITV has declared an interim dividend of 2.52p per share, an increase of 5%. Longer term, the group's policy remains for ordinary dividends to grow broadly in line with earnings, with the payout ratio at around 50% of adjusted earnings.

Looking ahead, ITV NAR is expected to be down around 4% in Q3, impacted by wider economic uncertainty. Over the full year the group expects to outperform the television advertising market, and is confident Studios can deliver further good organic growth.

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.

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.