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ITV - wants to be more than TV

Nicholas Hyett | 25 July 2018 | A A A
ITV - wants to be more than TV

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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: 108.25 | Buy: 108.35 | Change -1.45 (-1.32%)
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ITV's half year results show revenue rising 8%, although adjusted profits fell 7% to £375m as Broadcast & Online profits dipped.

The interim dividend ticked up 3% to 2.6p per share, and the group says it is targeting a full year dividend of at least 8p in 2018 and 2019.

The results detail new CEO Carolyn McCall's vision for the group.

The shares moved slightly higher on the news.

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Our view

The new CEO has set out her vision for ITV to be 'more than just TV'. That means strengthening the production business and exploring new direct to consumer opportunities.

However, her changes represent a 'refresh not a reboot'. Much has already been done to transform ITV into a more balanced business.

A string of bolt-on acquisitions has bolstered ITV Studios, which makes and sells programmes such as The Voice and Hell's Kitchen. More deals are likely.

ITV itself has been mooted as a potential target. The obvious buyer is Liberty Global. It already owns 10% of ITV's shares and will have extra firepower once the EUR18bn deal to sell its European cable assets to Vodafone completes. However, the group has distanced itself from such a move.

The growth of the Studios business 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, and Brexit-induced doubts mean ITV's customers are tightening the purse strings.

Another challenge is how to adapt 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, two rivals with significantly bigger budgets. That probably explains why McCall will be investing in data analytics, insight and technology rather than stretching the content budget much past £1bn. It's hoped those investments will be covered by the £35-40m of cost savings ITV is now targeting within 3 years.

ITV will also be building its direct to consumer business. Think in-show voting, pay-per-view, and merchandise. A sensible idea, but probably not one that will move the dial anytime soon.

The shares have dropped to 10.8 times expected earnings, around 18% below historic norms. While the challenge presented by Amazon and Netflix is huge, we think ITV is doing the right things, given the resource available.

Advertising conditions will likely become more favourable in the future. With the group's cash generative business model giving credibility to its plans to at least maintain the dividend in the coming years, those who back ITV to find its niche in this turbulent market should at least be paid for their patience.

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First half trading details

Broadcast & Online revenue rose 3% to a shade over £1bn, boosted by a 48% increase in online revenue. With costs up 8%, including the cost of putting on the World Cup, profits before interest, tax and amortisation dropped 12% to £257m.

With the help of the football, and a strong showing from Love Island, ITV Family share of viewing was up 9%. Shortly after the half-year, 26.6m people watched England's defeat to Croatia.

ITV Studios revenue of £803m has increased 16% on the prior year, with organic growth of 11%. Costs increased, but adjusted EBITA still rose 7% year-on-year at £118m.

Free cash flow after payments for interest, cash tax and pension funding rose 22% to £184m. Despite these extra inflows, net debt remained steady at £1bn, as a result of dividend payments and acquisitions.

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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.

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.