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ITV - boosted by growth in ITV studios

Emilie Stevens, Equity Analyst | 5 March 2020 | A A A
ITV - boosted by growth in ITV studios

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ITV plc Ordinary 10p

Sell: 123.05 | Buy: 123.20 | Change 3.75 (3.12%)
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ITV finished the year with net revenues up 3% at £3.3bn, driven by growth in the ITV Studios business offsetting a fall in total advertising revenues - albeit a lower drop than expected. Underlying cash profits (EBITA) fell 10% to £729m.

A final dividend of 5.4p was announced, taking the full year payment to 8.0p per share, in line with last year. ITV expects the dividend to remain the same next year.

The shares fell 9% following the announcement.

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Our view

ITV continues to battle against a multitude of headwinds. Unfortunately, full year results brought news that, at least in the short term, coronavirus is now one of them - with travel companies cutting advertising spend over the next few months.

It's come at what is already a difficult time for the advertising market. Wider economic and political uncertainty has put advertising budgets 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. Early signs are good but they're still small fry and we worry whether enough 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's main defence is diversifying ITV away from advertising trends altogether and a big part of becoming "more than TV" is strengthening the production business.

So far the signs are positive. The Studious business, which makes and sells programmes such as The Voice and Hell's Kitchen across the globe, now makes up just over a third of the business. It's growing nicely and on track to grow revenues on average by 5% over the next few years. It's doing particularly well overseas too, which accounts for a large chunk of the division's revenue.

Unfortunately there's no escaping that selling advertising space still contributes the lion's share of both revenue and profits. 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. It enables advertisers to control and target campaigns across ITV's on-demand services. By improving advertisers return on investment you'd hope it would encourage them to splash more cash overall.

While we can't deny ITV has made good progress, conditions are tough and it seems it could be a while before the group looks convincingly "more than TV". The shares currently trade noticeably below their longer term average at 8.7 times future earnings and offer a prospective yield of 7%. ITV plan to keep the dividend at 8p next year but a challenging year lies ahead and investors should be mindful dividends aren't guaranteed.

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Full Year Results

Broadcast revenues fell 2% over the year to just under £2.1bn. This largely reflects a 1.5% drop in total advertising revenue to just under £1.8bn - better than the group expected but reflecting lower TV advertising spending failing to offset a 21% increase in Online ad revenues.

Lower revenue together with a 4% increase in costs, driven by Rugby World Cup and football coverage but also reflecting higher online costs and marketing spend for the Britbox launch, meant Broadcast & Online underlying cash profits were £462m, down 17%.

ITV's total viewing hours were 4% lower at 16.3bn hours, in line with the market and reflecting strong comparators from the Football World Cup. The group's total share of viewing remained flat year-on-year at 23.6%. ITV Hub now has 31m accounts and monthly active users are up 28%. Following a "successful" launch in November 2019 BritBox UK (of which ITV owns 90%) is now available on 15m UK screens.

ITV Studios saw net revenues rise 12% to £1.2bn. That reflects growth across all areas but a particular strong performance in ITV Studios US and ITV Studios International - which together account for over half of Studios revenues. Despite a 10% rise in costs, underlying cash profits rose 5% to £267m.

Lower profitability together with investment in new propositions including Planet V (ITV's addressable advertising platform) and BritBox, and higher interest and tax payments - saw underlying free cash flow fall to £359m, down from £469 the prior year. Net debt finished the year at £1.2bn down from £1.4bn the prior year.

Looking ahead to the next year ITV expects total advertising revenue to be up 2% in Q1 but "early indications suggest total advertising revenue will be down 10% in April" - relating to coronavirus disturbances. ITV Studios, online and direct to consumer (D2C) divisions are all expected to grow revenues, with online and D2C achieving double digit growth.

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