ITV plc (ITV) Ordinary 10p
HL comment (28 July 2021)
Half year revenue rose 26% to £1.8bn, reflecting double digit growth across both the Studios business, and restructured Media & Entertainment division - which includes broadcast and on-demand. Underlying operating profit almost doubled to £327m.
CEO Carolyn McCall said ITV is ''emerging from the worst effects of the pandemic''. The group plans to reintroduce dividends, rebasing to 5p a share, with the first dividend under the new policy to be a 3.3p payment announced at full year results.
ITV expects advertising revenue to be up 68% for July, 17-20% for August, with September harder to predict.
The shares rose 1.3% following the announcement
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. 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. More recently the Euros acted as a welcome boost. 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. 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 compared to the 8.0p per share on offer before the pandemic.
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, and investors could be left holding a weakened traditional broadcaster.
ITV key facts
- Price/earnings ratio: 9.7
- Ten year average Price/earnings ratio: 11.5
- Prospective dividend yield (next 12 months): 4.6%
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.
Half year results
In Media & Entertainment, advertising revenue rose 29% to £866m, feeding into total revenue of £1.0bn. The Euros helped the ITV main channel increase its share of viewing 3% to 17.4%. However, overall viewing across the wider family of channels fell 6% as social restrictions eased in the second quarter, and there were some programme delays and cancellations. The viewer declines were entirely led by traditional TV, with online viewings rising - ITV Hub was up 6%.
ITV Hub accounts rose 7.5% to 34.6m, although the premium ad-free version has seen additions run behind pre-pandemic levels. BritBox, the joint streaming product with the BBC, now has over 2.5m subscribers in the UK and internationally. Total M&E underlying profits more than doubled to £232m, although Britbox UK losses widened £8m.
Within ITV Studios some "challenges remain in delivering programmes under COVID-19 restrictions", but most productions are back up and running. Revenue rose 26% to £798m, which offset a rise in costs and underlying profit rose 53% to £95m. The group said it plans to ramp up scripted content for ''over-the-top'' platforms like Netflix, but this will have an adverse effect on working capital because of extended payment terms. It also means margins will be held back because the bigger platforms tend to want worldwide rights to the content.
Free cash flow fell from £345m to £71m, despite the higher profits as ITV paid tax and pension payments which were deferred in the pandemic. Net debt fell from £545m at the start of the year to £467m, which is equivalent to 0.6 times cash profits.
The group said it's on track to deliver £30m in cost savings this year
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