Interactive Investor

ITV shares plunge 18% after annual results

3rd March 2022 08:29

Richard Hunter from interactive investor

Bears had already given the broadcaster a mauling and investors are not impressed with these results, despite good performance in places. Our head of markets explains what's going on at the FTSE 100 company. 

ITV (LSE:ITV) has shown agility and foresight in adapting to a quickly evolving landscape and at the same time has laid strong foundations for future growth.

The pandemic accelerated some of the viewing habits which were becoming ensconced, not least of which was the variety of devices being used to view content, in a move away from the traditional linear viewing. This in turn put pressure on advertising revenues, which were (and remain) an important contributor to overall profit.

Within the Media and Entertainment unit, total advertising revenue grew by 24%, also up by 11% on pre-pandemic levels and represented a record year. This was achieved through the evolution of delivery, with video on demand revenues up by 41%. The unit’s share of viewing increased marginally to 22.3%, underpinned by the Euros football tournament and the ongoing popularity of programmes such as Love Island. The company now has 3.6 million global subscribers, while the BritBox joint venture is also growing apace, with a 45% jump in subscribers now totalling over 730,000.

The next step in ITV’s strategy is to ramp up digital acceleration, underpinned by the current success of ITV Hub, ITV Hub+, Planet V and the BritBox tie-up. The target is for £750 million of revenues by 2026 and the launch of “ITVX” in the fourth quarter of this year will be a new and interesting development.

The integrated streaming platform will look to benefit further from the dual opportunities of Advertising video on demand (AVOD) and Subscription video on demand (SVOD) growth. Investment of £20 million in 2022 will increase to £160 million in 2023 and by the end of the target period is expected to be financially covered by the incremental revenue growth.

Meanwhile, the other half of the group is also experiencing a strong return to form, as lockdown restrictions have enabled the resumption of productions at the ITV Studios business. In December, ITV expected a return to levels of pre-pandemic revenues and have more or less delivered, with revenues just 2% shy. Over the last year, revenues have increased by 28%, with a string of its titles being among the most watched (and purchased) programmes at home and abroad, through a mix of both scripted and unscripted programmes.

The numbers at a group level are therefore looking healthy on any number of metrics. Revenues grew by 28% and pre-tax profit spiked by 48% to £480 million. Net debt also reduced from £545 million to £414 million, while liquidity remained strong at £1.5 billion. The strength of the balance sheet will enable the funding of the targets which the company has set itself and has also enabled the return to the payment of a dividend. The immediate yield will stand at around 3%, which is ample given the current interest rate environment, but is also expected to rise to around 4.5% based on current projections. This expression of management confidence at a time of ambitious growth is perhaps testament to the company’s newly found optimism.

Of course, the deep pockets and ominous presence of behemoth rivals such as Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Disney (NYSE:DIS) remain major hurdles in the general arena. However, the space is one which continues to grow exponentially and ITV seems content to cut its cloth and become profitable in its own right, as opposed to tackling the competition head-on. In addition, its burgeoning creative talent within the Studios business is currently providing a growing stream of popular content.

Leading up to these results, the market had reacted with some cynicism to ITV’s lofty ambitions and the share price reaction today reflects a mauling by the bears, with a concentration on the investment spend needed and the strength of the competition rather than improving prospects.

Even prior to the sharp decline in opening trade, the price had fallen by 4% over the last year, as compared to a gain of 11% for the wider FTSE100 and had struggled to make any more progress over the last two years. It remains to be seen whether the current market consensus of the shares as a "buy" remains intact given the reaction to what should otherwise have been a reasonably upbeat strategic outlook.

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