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ITV - Revenues stall as Studios slow

Nicholas Hyett | 7 November 2018 | A A A
ITV - Revenues stall as Studios slow

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ITV plc Ordinary 10p

Sell: 121.05 | Buy: 121.15 | Change 0.85 (0.71%)
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ITV saw revenue rise 6% across the first nine months of the year to £2.3bn, slightly behind the level of growth reported at the half year as growth in studios slowed. However, overall performance remains in line with management's expectations.

The shares fell 3.5% in early trading.

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Our view

New CEO Carolyn McCall 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. 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, Liberty 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 10.2 times expected earnings, around 21.5% below the historic average. 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. The cash generative business model supports plans to at least maintain the dividend in the coming years, currently a 5.3% prospective yield. Those who back ITV to find its niche in this turbulent market should at least be paid for their patience.

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Third Quarter Trading Update

Total ITV viewing rose 5% to 12.7bn hours in the first nine months of the year. The group's share of viewing rose 9% to 23.3%.

ITV Broadcast & Online posted revenues of £1.5bn in the period, up 2%, thanks to a 43% increase in online revenue. That reflects a 37% increase in time spent viewing the ITV Hub and 4% increase in total viewing time across all ITV products. Total advertising revenue is expected to be flat for the year as a whole, as the uncertain economic environment dents advertising demand.

ITV Studios saw revenue rise 10% in the first three quarters, with organic revenue up 7%. Full year organic revenue growth is expected to be about 3%, due to the lack of a Hell's Kitchen in 2018, and delayed delivery of Snowpiercer.

Net debt increased 2.9% from the half year to £1.1bn.

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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.