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ITV - revenue up, growth across the board

Sophie Lund-Yates, Equity Analyst | 10 November 2021 | A A A
ITV - revenue up, growth across the board

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ITV plc Ordinary 10p

Sell: 73.16 | Buy: 73.26 | Change -1.06 (-1.43%)
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In the first nine months of the year, ITV's total external revenue rose 28% compared to 2020 to £2.4bn, and was up 8% on pre-pandemic levels. That reflects growth in both the Studios and Media & Entertainment divisions.

Total advertising revenue for the full year is expected to reach a record. It's expected to rise 24% following the easing of Covid restrictions. As a result, ITV predicts its cash conversion will be 60%, not 30% as previously thought.

The shares were up 6.2% following the announcement.

View the latest ITV share price and how to deal

Our view

We can't knock ITV's progress.

Advertising revenue is rebounding well. The numbers look particularly impressive given the very tough conditions from this time last year. In times of economic hardship, marketing budgets are among the first to get cut, and that made 2020 difficult. Advertising revenue is very much still ITV's bread and butter.

To that end, there are some things we're nervous about. 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. ITV's digital channels are doing well (more on that later), but overall ITV viewing is down, suggesting traditional TV is still falling out of favour. That's exactly the trend that stops advertisers splashing out on ad slots.

We're impressed with ITV's progress on its own digital platforms like ITVHub, but the likes of Amazon and Netflix have substantially deeper pockets and wider appeal. What that means for long-term market share is a question mark.

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. But where we once questioned how long this strategic pivot would take, we're now asking how fruitful it will be. There is insatiable demand from the likes of Netflix for the high-end dramas ITV Studios can produce, but the bigger players tend to demand the worldwide rights to original content commissions, which holds margins back. Content production is a notoriously expensive activity. For Studios to make up a meaningful part of ITV's overall story, it will need to find a way to better leverage its productions.

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. The good news is that dividends are back on the agenda after last year's cancellation - albeit from a lower base.

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 whole. We admire the direction of travel, but this strategic shift will take some time. There's a risk this shift takes too long.

ITV key facts

  • Price/earnings ratio: 7.9
  • Ten year average Price/earnings ratio: 11.5
  • Prospective dividend yield (next 12 months): 4.8%

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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Nine month trading update

In Media & Entertainment, total advertising revenue rose 30% overall, after initially rising 68% in July. For the fourth quarter this is expected to be up 11-13%. Within total advertising revenue, revenue from advertising on on-demand channels rose 54%. Monthly active users for ITV's digital viewing products rose 22% to 9.6m. Total divisional revenue rose 26% to £1.6bn.

ITV's total viewing hours, which includes traditional TV, fell 5%. Within that, online viewing rose 39%.

Next year total schedule costs will be around £1.16bn. This includes the FIFA World Cup, the FA Cup and dramas.

Studios revenue rose 32% to £1.2bn, and was up 6% on 2019. The division remains on track for the year, and is ''taking advantage of the strong global demand for content''.

The group's on track to make £30m of cost savings this year.

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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