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ITV - Brexit woes hamper first quarter performance

George Salmon | 8 May 2019 | A A A
ITV - Brexit woes hamper first quarter performance

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ITV plc Ordinary 10p

Sell: 106.20 | Buy: 106.30 | Change -1.45 (-1.34%)
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CEO Carolyn McCall says ITV's first quarter performance was as expected.

After stripping out internal supply of £131m, total external revenue was down 4% to £743m, driven by economic uncertainty and declines in TV advertising.

The shares were down 2.2% following the announcement.

View the latest share price and how to deal

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 will mean building out the Studios business, which makes and sells programmes such as The Voice and Hell's Kitchen. More recently the division's had a hand in some successful dramas too - Line of Duty or Bodyguard anyone?

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.

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. ITV's also having to adapt to a change in viewer habits, as we binge-watch streamed series on demand rather than settle down in front of the box.

The group has delivered encouraging growth in the number of ITV Hub users, but this brings it into competition with Amazon and Netflix, and ITV can't match their blockbuster budgets. Instead, McCall is investing in a boxset streaming partnership with the 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.

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 9.6 times expected earnings, 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 6.1%. But with the payout likely to be closely-tied to profit changes from 2020 on, longer-term growth prospects are less than certain.

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First quarter trading details

Broadcast & Online revenue fell 7% to £489m, impacted by a 7% decline in total advertising revenues. ITV expects total advertising revenue to be down 6% over the first half of the year, against a tough comparison that includes the 2018 World Cup.

Total viewing hours dropped by 3%, although ITV's total share of viewing grew 4%, with online increasing 16%. The number of registered ITV Hub users rose 29% to 28.4m.

Within the Studios division, revenue rose 1% to £385m. With over £120m more revenue secured than at the same time last year, the group is confident of delivering good growth in the remainder of the year.

However, ITV warned currency headwinds could unfavourably impact Studios revenues by around £20m, and adjusted EBITA (earnings before, interest, tax and amortisation), by £3m to £5m over the full year.

Net debt stands at £981m, a 5.8% increase on last quarter. ITV is making investments including the preparation for the launch of BritBox later this year.

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.