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ITV - A strong start to the year

George Salmon | 10 May 2018 | A A A
ITV - A strong start to the year

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ITV plc Ordinary 10p

Sell: 120.95 | Buy: 121.05 | Change 0.75 (0.62%)
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New CEO Carolyn McCall says ITV's year has started well, both on and off screen.

The group's first quarter trading update shows total external revenue increased 5% to £772m, driven by 11% growth in ITV Studios revenue and 41% growth in online revenue.

The shares rose 4% on the news.

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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 that's given her the chance to wheel out the 'come back after the break' message.

With the future still unclear, the shares trade on 9.8 times expected earnings, around 30% below their historical average, and offer a prospective yield of 5.4%.

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First quarter trading details

Revenue from the Broadcast & Online increased 3% in Q1, to £526m. This includes 25% growth in Online, Pay & Interactive and 1% growth in net advertising revenue (NAR).

Year-to-date, ITV's total share of viewing has risen to 22.8%, up from 21.6% last year. Among the programmes to deliver good returns were long-running soaps Coronation Street and Emmerdale, and entertainment shows Dancing on Ice and Saturday Night Takeaway.

Total ITV Studios revenue rose 11% to £382m, with organic revenues up 9%.

Looking ahead, total advertising (NAR, online and sponsorship) is expected to be up 2% over the first half with continued strong growth in online, with ITV Family NAR broadly flat.

Carolyn McCall is expected to detail a strategic update with interim results on 25 July.

Find out more about ITV shares including how to invest

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.