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ITV - ad revenue still down but improving

Sophie Lund-Yates, Equity Analyst | 5 May 2021 | A A A
ITV - ad revenue still down but improving

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ITV plc Ordinary 10p

Sell: 73.16 | Buy: 73.26 | Change -1.06 (-1.43%)
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Total external revenue rose 2% to £709m in the first quarter. That was driven entirely by Studios, while Media and Entertainment declined because of lower advertising revenue.

ITV said advertising trends have been positive since March, with April up 68% and June is expected to be up 85-90%.

The shares were broadly flat in early trading.

View the latest ITV share price and how to deal

Our view

ITV's financial year has got off to a good start.

Advertising revenue is recovering, which is a big relief given the challenges faced last year. In times of economic hardship, marketing budgets are among the first to get cut, and that made 2020 very tough. The schedule is also looking better following high profile cancellations during the pandemic.

That should help prop things up in the medium term - having unmissable content is what attracts advertising revenue. These are all important milestones, because advertising revenue is very much still ITV's bread and butter.

To that end, there are some things we're nervous about. While we can't knock recent progress, advertising revenue was on shaky ground pre-pandemic. This has a lot to with digital rivals swooping in and making traditional broadcasting ad slots less valuable. We expect pressure on this revenue source will continue. The group does have its own streaming platforms, but we question if it will be able to pick up a meaningful chunk of streaming market share. The likes of Amazon and Netflix have substantially deeper pockets and wider appeal.

ITV isn't blind to these challenges and has clearly decided "if you can't beat 'em, join 'em". ITV Studios is a big part of future-proofing the business, and the division creates content for other platforms and channels.

We admire this plan. The rise of our boxset-binge culture means this area offers huge potential. The question is how long this strategic pivot will take, especially considering the production setbacks because of Covid. The division makes up a sizeable chunk of group revenue now, but it is miles off being the full story.

The group's financial position is better than it has been in the past, with net debt back under control. That means there is breathing room while ITV works to turn itself around. Investors should note though that there's no dividend on offer, as ITV prioritises investment, so they aren't being paid for their patience.

ITV continues to live with a lot of uncertainties and that's reflected in its current valuation. This is likely to remain the case so long as advertising revenues remain the biggest money maker, so it's important we see other revenue streams like Studios, become a bigger part of the story. This strategic shift will take some time.

ITV key facts

  • Price/Earnings Ratio: 10.9
  • 10 year average forward Price/Earnings ratio: 11.5
  • Prospective 12 month yield: 4.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First quarter trading details

Total advertising revenue, which includes online, fell 6% to £402m. However, trends have been improving, with March up 8% after January and February were down 9% and 15% respectively. ITV total viewing rose 1% thanks to a stronger schedule, including the Six Nations. Online viewing fell 11% to £149.1m hours, because of the absence of Winter Love Island. BritBox UK is now available on Amazon Prime Video channels.

Overall, Media and Entertainment revenue fell 3% to £484m.

ITV Studios revenue rose 9% to £372m, and productions are "largely continuing" despite pandemic disruption. The group said "COVID-19 restrictions globally continue to impact the delivery of productions with international travel and multi-location shoots, particularly drama".

Net debt, which includes leases, was £558m at the end of March, compared to £545m at the end of December. The group had access to £622m of gross cash and undrawn credit of £778m at the last count.

ITV's on track to deliver its £30m cost saving target this year. Total advertising revenue for the first half is predicted to rise 26%.

Find out more about ITV shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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