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ITV - higher cost push profits down

George Salmon | 27 February 2019 | A A A
ITV - higher cost push profits down

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ITV plc Ordinary 10p

Sell: 120.65 | Buy: 120.75 | Change 0.45 (0.37%)
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ITV's net revenue rose 3% to £3.2bn, driven by continued growth in the Studios business. However, the higher revenue was more than offset by cost increases in broadcast & online, dragging full year earnings per share down 4% to 15.4p.

The shares fell 1% on the news.

The final dividend of 5.4p takes the full year payout to 8p per share, up 3% on 2017.

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Our view

CEO Carolyn McCall wants ITV to be 'more than just TV'. That means strengthening the production business and exploring new direct to consumer opportunities.

Her strategy is broadly a continuation of that of previous CEO Adam Crozier, who oversaw a string of bolt-on acquisitions in the Studios business, which makes and sells programmes such as The Voice and Hell's Kitchen.

ITV itself has been mooted as a potential target. The obvious buyer is Liberty Global. It already owns 10% of ITV's shares, but the group has distanced itself from such a move.

The growth of Studios means ITV is less exposed to UK advertising trends than it once was, but a big chunk of profit still comes from selling advertising space. Not ideal given 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 best at drawing in a mass TV audience, but Facebook and Google provide a new way of getting in front of potential customers. And with viewing habits moving towards a more on-demand set up, TV is moving on too.

This brings the group into competition with Amazon and Netflix, and ITV can't match their blockbuster budgets. Instead, McCall is investing in a boxset partnership with BBC, ramping up insight and technology and building up its direct to consumer business. Think in-show voting, pay-per-view, and merchandise. It's hoped those investments will be mostly covered by the £35-40m of cost savings targeted by 2021.

Overall, we think ITV is doing the right things, given the resource available. But it's difficult to see how its changes can move the dial much in the short-term.

So, while advertising conditions will likely improve in the future, there's no guarantee ITV will be in a strong enough position to take advantage. That explains why the shares have dropped to 9.1 times expected earnings, around 35% below the historic average.

The group should be able to reward those who think it can find its niche in this turbulent market with a steady dividend in 2019, which means the shares offer a prospective yield of 6.2%. But with the dividend likely to be closely-tied to profit changes from 2020 on, longer-term growth prospects are less then certain.

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Full year results

Within Broadcast & Online, total advertising revenue rose 1% to £1.8bn, as 36% growth in online offset lower spot advertising. Total share of viewing rose from 21.7% to 23.2%, boosted by growth from Love Island and Good Morning Britain.

Despite divisional non-advertising revenue, including the growing direct to consumer segment, rising 2% to £301m, adjusted earnings before interest, tax and amortisation (EBITA) fell from £599m to £555m. That was after programming and other costs rose.

After stripping out internal revenue, the Studios business saw revenue rise 6% to £1.1bn as the non-repeat of Hell's Kitchen in the US was more than offset by other international growth. UK revenue was flat at £695m. EBITA rose 5% to £255m.

Lower profits fed through to an 11% fall in free cash flow, to £469m. After dividends and acquisition costs, net debt remained broadly unchanged at £927m.

Looking ahead, ITV expects advertising revenue to drop 3-4% in the early part of the year, followed by tougher comparatives around last year's Football World Cup.

Scheduling costs are expected to be around £1.1bn in 2019, up slightly on 2018. Cost savings of £15m will only partially offsetting spending of up to £65m on restructuring and projects including a partnership with the BBC to create a new on-demand service for UK viewers.

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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.

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