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ITV - advertising revenue better than expected

Nicholas Hyett | 24 July 2019 | A A A
ITV - advertising revenue better than expected

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ITV plc Ordinary 10p

Sell: 120.65 | Buy: 120.75 | Change 0.45 (0.37%)
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A 5% decline in advertising revenue was better than expected, despite the political uncertainty. However, a decrease in non-advertising revenue meant total external revenue fell 7%, to £1.5bn.

An interim dividend of 2.6p is flat on last year, with full year dividend expectations unchanged.

The shares rose 5.7% following the announcement.

View the latest share price and how to deal

Our view

ITV is struggling against a multitude of headwinds.

First there are the difficulties in the advertising market. Brexit-induced doubts mean budgets are under pressure, and marketing chiefs are increasingly turning to the likes of Facebook and Google to get in front of potential customers.

And then there's the fact the way we watch TV is changing. The advent of streaming means viewers can binge-watch series from the likes of Amazon and Netflix on demand.

Being firmly in the cross hairs of some of the biggest and most dynamic tech companies out there explains why the shares have dropped to 8.1 times expected earnings, below the historic average.

ITV is trying to tackle the streaming problem by investing in the ITV hub and launching Britbox, a joint venture with the BBC. It's due to go live at the end of this year, and will include a catalogue of British content. We think this strategy makes sense on paper but we worry about how effective it'll be.

The likes of Netflix and Amazon have sprinted ahead and have significantly deeper pockets, and there's no guarantee enough people will be convinced to sign up to another monthly subscription.

CEO Carolyn McCall is also looking to further diversify away from advertising trends by strengthening the production business and exploring new direct to consumer opportunities.

This'll see more resource put into 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?

Again, we think this is the right call. But there's no getting away from the fact a big chunk of profit still comes from selling advertising space. On this front, there's not much ITV can do other than hope conditions improve soon.

The shares offer a prospective yield of 6.4%, but with the dividend set to be closely tied to earnings in the future, we think the longer-term growth prospects are less than certain.

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Half year results

Lower revenues and higher costs, including investment in the Studios business and new Britbox streaming service, fed into adjusted EBITA (earnings before interest, tax and amortisation) of £327m. That's 13% behind last year.

Within Broadcast & Online, total revenue declined 5% to £991m, as growth online was offset by the declines in advertising and non-advertising revenue. Less competition revenue, and fewer pay per view boxing events were some of the drivers behind this. Total share of viewing moved marginally higher to 23.6%.

EBITA, excluding Britbox, was down 17% to £214m.

After stripping out sales to ITV channels, the Studios business saw revenue fall 11%, to £487m. That reflects timing and some cancellations in ITV America, where revenues will be weighted towards the second half, offsetting good growth in ITV Rest of World. UK revenue increased 1% to £331m, while divisional EBITA fell 2% to £116m.

Lower profits contributed to a 25.5% fall in free cash flow, to £137m. After dividends and pension contribution costs, net debt was slightly higher £1.1bn.

Looking ahead, the group believes it will achieve cost savings of £20m in the year - with 50% delivered in the first half. Advertising revenue growth is expected to be between -1% and +1% next quarter, with Studio growth of 5% for the year as a whole.

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.