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ITV - on track for the full year

Nicholas Hyett | 12 November 2019 | A A A
ITV - on track for the full year

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ITV plc Ordinary 10p

Sell: 113.80 | Buy: 113.95 | Change 3.55 (3.21%)
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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 ITV share price and how to deal

Our view

ITV's battling 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 changes to the way we watch TV. The advent of streaming means viewers can binge-watch series from the likes of Amazon and Netflix on demand.

ITV is trying to tackle the streaming problem by investing in the ITV Hub and launching Britbox, a joint venture with the BBC, and home to a catalogue of British content. We think this strategy makes sense on paper but we worry about how effective it'll be. There's no guarantee people can be convinced to sign up to another monthly subscription, and the likes of Netflix and Amazon have significantly deeper pockets.

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 will 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 and The Bodyguard included. Again, we think this is the right call.

Unfortunately there's no escaping the fact a big chunk of profit still comes from selling advertising space. To some extent ITV can only sit tight and hope conditions improve soon, but the launch of Planet V should help it make the most of its growing online audience. The platform enables advertisers to control and target campaigns across ITV's on demand services. Hopefully improving advertisers return on investment will encourage them to splash more cash overall.

Early signs of progress have seen ITV's rating recover somewhat to 10.2 times expected earnings, but reflecting the challenges ahead, that's still below the longer term average. The shares offer a prospective yield of 6%, but with dividends set to be closely tied to earnings in the future, longer-term growth prospects are still less than certain in our view.

Register for updates on ITV

Third Quarter Trading Update

ITV's total viewing hours fell 6%, although the ITV Family's share of viewing remained flat at 23.2%. During the quarter, the ITV Hub reached its target of 30m registered users two years ahead of plan.

Broadcast & Online revenues fell 3% to £1.5bn over the first nine months. Despite a positive third quarter, where advertising revenues rose 1%, total advertising revenue for the nine months fell 3% to £1.2bn. Online revenues continue to grow strongly up 23%, reflecting the 10% rise in total online viewing hours. Looking ahead, ITV expects total advertising revenues to be flat or marginally up next quarter, finishing the year 2% lower overall.

ITV Studios revenue was broadly flat at £1.1bn over the first nine months. The group expects to deliver a strong fourth quarter, particularly in the US. As a result management believe the division is on track to deliver its full year target of at least 5% revenue growth and a margin of 14 - 16%.

BritBox launched during the third quarter, with distribution and marketing deals agreed with EE and BT, and a content partnership with Channel 4 announced. Development of ITV's advertising platform is on track for a roll out to media agencies in Q1 2020.

ITV recently exchanged contracts for the sale of its London Television Centre to Mitsubishi Estate London Limited for £145.6m. The deal is expected to complete by the end of November and proceeds will go towards ITVs pension and reducing net debt.

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.