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ITV - withdraws full year guidance and final dividend

Sophie Lund-Yates, Equity Analyst | 23 March 2020 | A A A
ITV - withdraws full year guidance and final dividend

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ITV plc Ordinary 10p

Sell: 95.22 | Buy: 95.28 | Change 1.96 (2.10%)
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ITV has announced the COVID-19 pandemic is having a significant impact on the Studios business, and advertising revenue trends are weaker.

The uncertainty means it has withdrawn guidance for the full year and no longer expects to pay a final dividend for 2019. The group also retracted its intention to pay an 8p full year dividend for 2020.

The shares fell 10.7% in early trading.

View the latest ITV share price and how to deal

Our view

ITV continues to battle against a multitude of headwinds. Unfortunately coronavirus is now one of them, and advertising revenue and the Studios business are coming under strain.

The pandemic has 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. The majority of revenue and profit still comes from selling advertising space, so it's disconcerting to see trends weaken.

Of course we can't say what the overall fall out from coronavirus will be, but with a longer-term spell of economic uncertainty possible, it might make for ugly reading when we eventually find out.

The Studios business is feeling the pain too, with production grinding to a halt. That's a blow because this division - where ITV 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 an important pillar in the group's plan to become "more than TV", and to move it away from relying on those dwindling advertising revenues.

To its credit, ITV should be able to offset some of the lost income with its back catalogue of existing content. This can be sold to streaming partners or other channels, and is a useful extra revenue stream, although it's not a cure-all.

We also shouldn't forget the group's own streaming efforts. As the way we watch TV has changed ITV is taking on the competition 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.

The group's balance sheet is in decent health, with net debt compared to cash profits not unduly high. But in the coming months that will be something to watch - if revenues and profits are squeezed too much, any debt pile can start to look onerous.

Using analysts' latest estimates the shares change hands for 5 times expected earnings, less than half the ten year average. Remember this could change because future profits are very uncertain at the moment. Overall we're concerned about what a severe dip in advertising and Studio revenue would mean for the group. There's a lot riding on the current disruption ending sooner rather than later.

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COVID-19 trading update

Restrictions on working practices means it's difficult to film productions, and ITV has paused a significant number of UK and international productions. It's implementing contingency plans to allow production of as many programmes as possible, particularly news and live shows. The full financial impact will depend on how long restrictions are in place.

The group stated the Studios cost base is largely flexible. It also expects some of the financial impact to be offset by an increased demand for existing content.

The closure of shops, factories and entertainment venues means advertising revenue is weaker, and forecasts for March and April have deteriorated. The group said "we have seen further deferrals in advertising which are now coming from across the advertiser categories rather than just in travel".

Over a full year each 1% decline in total advertising revenue reduces revenue and profit by around £17m, before any measures to offset the decline.

To reduce costs and preserve cash flow ITV expects to reduce its programme budget by at least £100m, helped by the postponement of Euro 2020. The group will also further reduce discretionary spending and capital expenditure.

Combined with the savings from not paying the 2019 final dividend, these measures will mean more than £300m of cash will be retained in the business.

The group has access to £150m of unrestricted cash, as well as a £530m undrawn credit facility. There is a further £300m undrawn facility which expires in June 2021. There are no bond repayments due until September 2022.

Find out more about ITV shares including how to invest

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