ITV Studios does its duty even as advertising revenue slides

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“The BBC continues to bask in the acclaim enjoyed by Line of Duty but the show was actually made by ITV’s World Productions. This may be one reason why non-advertising revenue at ITV is holding up better than advertising sales - after The Bodyguard in 2018 this is actually the second year in a row that ITV has made the BBC’s most critically acclaimed show,” says Russ Mould, AJ Bell Investment Director.

“Non-advertising revenue now represents more than half of the total so the broadcaster’s strategy to develop content-creation capabilities is proving its worth, although the growth here is still not proving enough to offset the decline in advertising.

Source: Company accounts

“That is why ITV shares are down today, even if the 7% year-on-year first-quarter drop in ad sales is no worse than management had forecast. Chief executive Dame Carolyn McCall’s forecast of a 6% slide in the first half is also as expected, although that could still be a bit of a stretch as the second-quarter last year benefited strongly from the FIFA World Cup in Russia.

Source: Company accounts

“ITV’s advertising income faces two challenges. In the near term, the UK’s economic outlook may not be helping, as consumer confidence remains subdued.

Source: Refinitiv data

“Farther out, ITV faces the challenge posed by broadcast rivals such as Amazon and Netflix, where subscriptions drive revenues and customers are persuaded to pay for those subscriptions by the prime (and often unique, internally-created) shows that are on offer.

“This shows the value of content and ITV is therefore at least rising to this challenge. Rising user numbers for the ITV Hub do show that viewers like what they see on their screens and the planned launch of Britbox in the second half of this year shows that ITV is determined not to be left behind when it comes to streaming content, even if the initial start-up costs here will weigh on near-term profits.

“Pre-tax profit came to £767 million on an underlying basis last year, if you exclude £200 million of supposedly one-off items, and analysts expect that to decline by almost a fifth this year, with a drop in ad sales also taking its toll, before a rebound in 2020.

Source: Company accounts, Sharecast, consensus analysts’ forecasts

“Given such downbeat forecasts it is possible to argue that a lot of bad news is already factored into the ITV share price, although you might not guess that today as the shares head toward levels last seen in December and then before that in spring 2013.

“Perhaps investors are deciding that ITV’s business model faces structural challenges which will continue to hollow out the group’s earnings power and that the stock is simply a value trap. It certainly looks cheap on barely nine times forward earnings and with a dividend yield of nearly 6.5% but if earnings estimates keep going lower value-hunters may struggle to find a catalyst that can get the share price going, barring perhaps a bid.

“The lowly valuation may prompt some to wonder whether ITV’s burgeoning content catalogue could lure a predator, although John Malone’s Liberty Global group does not seem to be in a hurry to do anything with the 9.9% stake it acquired in 2014. Whether this will change, given ITV’s share price slump and the cash influx due should European regulators clear Liberty’s sale of its European cable operations to Vodafone, remains to be seen.”

These articles are for information purposes only and are not a personal recommendation or advice.


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.