Free-to-air broadcaster STV (STVG) was created by the combination of Grampian Television and Scottish Television in 2006 and now holds the Channel 3 commercial television licence for Scotland.

It is headquartered on the banks of the river Clyde in Glasgow, and it creates and distributes programmes across various platforms including broadcast, catch-up TV, online, mobile and streaming services.

Chief executive Simon Pitts tells Shares: ‘STV is an income and growth story. The company has delivered strong profit growth over the last few years, with operating profit up 35% since 2017 at nearly £26 million, alongside paying a progressive dividend which increased despite a tough economic climate last year.’

HOW DOES STV MAKE MONEY?

Under the leadership of Pitts, who has been its CEO since January 2018, the company has pursued a diversification strategy branching out into areas like streaming and capitalising on strengths with TV production for a diverse range of channels from BBC 1, Channel 4 to Apple TV.

‘We run Scotland’s largest TV production business, STV Studios, which has made a range of TV shows from high-end dramas to quiz shows like Catchphrase and Bridge of Lies and factual entertainment series like Antiques Road Trip.’

This strategy seems to have worked as STV has achieved a dominant position when it comes to viewers in Scotland: 2.5 million adults watch STV each week and streams on STV Player are up 63% year-on-year.

The broadcaster says its enhanced long-term partnership with ITV (ITV) will propel the ‘next phase of streaming growth, guaranteeing exclusive access to 100+ hours of new, original UK content every year’.

STREAMING SUCCESS FOR STV

As well as making money through innovation, creation and production of TV programmes through STV Studios, STV has enjoyed success with its streaming services.

Pitts readily admits that STV can’t compete with Netflix’s (NFLX:NASDAQ) back catalogue but says it still has an edge over its competitor as it does not charge for its service, which is a bonus during the cost-of-living crisis when UK households might be cutting back on subscription-based services.

Another difference between STV’s offering to viewers and Netflix’s is that the former is focused on UK original shows, not US series and repeats. Last year, the top 500 most watched programmes by people in Scotland across all services including Netflix, Amazon Prime and Disney+, 99% were either on STV, BBC or Channel 4.

‘We accounted for 66% of those, 329 of the top 500 programme episodes. Netflix, on the other hand, only had 1% of those shows,’ says Pitts.

ADVERTISING DOWNTURN

Although STV warned of a 15% fall in total advertising revenue for the first quarter of 2023, it reported an 11% rise in pre-tax profit of £22.2 million for 2022 compared to £20.1 million in the same period a year earlier.

Pitts is hopeful of an advertising recovery, saying: ‘Our advertising revenues were down in the first quarter against a backdrop of economic uncertainty. However, they were still higher than the first quarter of 2019, pre-pandemic, which shows you how robust the TV advertising market is when you have a dominant position.’

STV’s primary revenue stream is advertising. It sells slots to national and local advertisers around some of the biggest shows on TV including I’m a Celebrity, Britain’s Got Talent, hit dramas Unforgotten or Trigger Point, and its own news, current affairs and regional programming.

‘Advertisers can reach big audiences on our linear TV channel or buy targeted, addressable and sponsorship on our digital streaming service STV Player which has over 5 million registered users,’ says Pitts.

WHAT’S NEXT FOR STV?

The UK government recently approved the renewal of 10-year broadcast licences for STV and published a draft Media Bill with provisions to ensure prominence for public service broadcasting apps (including STV Player) on digital platforms.

Progressive Equity Research says that growth in content production and streaming should deliver over half of STV’s profit this year and should help drive overall group growth. Over the longer term, it estimates the group can deliver trend growth of around 7% annually in revenue and 10% in operating profit as STV diversifies beyond terrestrial broadcasting towards more content and streaming.

SHARES ARE ‘ATTRACTIVELY PRICED’

Anyone looking at the historical share price chart might wonder what’s gone wrong. Over the past

12 months, STV’s share price has fallen by 17%, caused by concerns over a potential slowdown in advertising and downgrades to earnings forecasts. On a five-year basis, they are trading 31% lower but ITV’s share price performance is even worse, down 57% over the same period.

STV and ITV share the same problem – advertising income is unpredictable and so the focus is falling more on production to drive earnings.

It is also important to note that STV’s pension deficit is significant, absorbing around half of free cash flow, but it is scheduled to be eliminated by 2030, according to Progressive Equity Research.

Shore Capital analyst Roddy Davidson says the shares have now reached the point where they are ‘very attractively priced’ – although it is worth noting that Shore Capital is the house broker, so not an independent view.

The shares trade on 7.3 times forecast earnings for 2023 and five-times EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) with a 4.5% prospective dividend yield.

‘This falls substantially short of adequately reflecting the quality of its underlying operations and medium-term growth prospects (with production and digital operations to the fore). We therefore see substantial share price upside potential,’ Davidson adds.

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