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ITV - Profits fall, but will 2018 improve?

George Salmon | 28 February 2018 | A A A
ITV - Profits fall, but will 2018 improve?

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ITV plc Ordinary 10p

Sell: 74.04 | Buy: 74.08 | Change 0.88 (1.20%)
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ITV's total external revenue rose 2% to £3.1bn. However, with growth coming in the lower margin Studios business, profitability slipped. Adjusted EBITA (earnings before in interest, tax and amortisation) dropped 5% to £842m.

The shares fell 3% on the news.

The final dividend rises 10% to 5.28p, bringing the full year dividend to 7.8p. There is no repeat of recent special dividends.

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Our View

Former Guardian and easyJet CEO Carolyn McCall has inherited a very different business to the one her predecessor, Adam Crozier, took charge of in 2010.

The balance sheet looks stronger, while a string of bolt-on acquisitions has bolstered ITV Studios, which makes and sells programmes such as The Voice and Hell's Kitchen. Going forwards, the challenge is to find the right deals at sensible prices.

On the flip side, ITV itself has been mooted as a potential 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 growth of the Studios business, where more than half of revenue is generated overseas, means ITV is 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. Brexit-induced doubts are lingering, so ITV's customers are tightening the purse strings. This presents a challenge for the new CEO.

She will also need to adapt ITV to a changing technological landscape. ITV remains the biggest commercial venue to draw in a mass audience, but viewing habits are moving towards a more on-demand set up.

This brings the group into competition with Amazon and Netflix. McCall has hinted at increasing the content budget past £1bn, but these two bruising rivals have significantly deeper pockets.

Other than this, the new CEO hasn't given much of her strategy away just yet. We'll have to wait until the interims later in the year to get a better idea of what's changing, although at least she's already had a chance to wheel out the 'come back after the break' message.

For now then, there's plenty of uncertainty and around. This goes some way to explaining why the shares trade on 10.9 times expected earnings, around a little over 20% below their historical average, and offer a prospective yield of 4.9%.

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Trading details

In the Broadcast & Online division, revenues fell 3% to £2.1bn. Profits fell 7% to £599m as a 5% decline in advertising revenue was only partly offset by the fast-expanding Online, Pay & Interactive division and cost savings.

ITV's share of viewing rose 0.4 percentage points to 21.7%, boosted by strong performances from Good Morning Britain and The Chase. ITV says momentum has continued into 2018, with total viewing volumes rising 3% year-to-date.

In the Studios business, sales rose 13% to £1.6bn. Organic revenue, which excludes the impact of currency and acquisitions, rose 7%. Adjusted EBITA was flat on 2016 at £243m, impacted by ongoing investment in the US and the non-recurrence of 2016's £37m Voice of China deal.

Internal supply, where ITV supplies programmes to itself, was £525m.

Free cash flow fell 17% to £527m, due to lower profits, higher investment in sports rights, and the timing of payments from customers. After taxes, dividend, acquisition and pension costs, net debt rose 43% to £912m.

The group acknowledges the economic outlook remains uncertain, but expects net advertising revenue to be positive in the first half, continuing the improvement seen towards the end of 2017. The online business is expected to deliver double digit revenue growth.

In Studios, ITV has already secured over 60% of budgeted revenues. Further organic growth is expected this year.

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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.

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