ITV shares slump on coronavirus warning

Even TV companies are not immune from the virus outbreak, explains our head of markets.

ITV (LSE:ITV) is swimming against an increasingly strong current and, while there are signs of progress, the underlying challenges to the business are still in evidence.

The ongoing change in viewer habits has long since put pressure on advertising revenues, which ITV has been trying to address for some time now by growing other lines of its business, especially its increasingly successful Studios arm. 

The 12% growth in Studios revenue is further vindication of a changing strategy, given that the group owns and manages its own content, with some significantly successful programmes having been produced. The medium term expected growth of 5% per annum at a margin of between 14% and 16% will bolster prospects if achieved.

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At the same time, the launch of the BritBox joint venture with the BBC is starting to gain some traction, although it is far from being imminently profitable. Elsewhere, the healthy share of the viewing market is being maintained, and the ITV hub numbers over 400,000 subscribers, helping to propel an online revenue increase of 21%. 

In addition, ITV has managed to squeeze £25 million of cost savings and is maintaining the dividend, which is well covered, and which provides a punchy yield of 7%, a clear attraction given the current interest rate backdrop. 

Source: TradingView Past performance is not a guide to future performance

The principal difficulty for ITV, however, is its ongoing reliance on advertising revenue, which still accounts for around half of the group total. With many viewers now choosing to stream programmes, at a time of their choice, through any number of alternatives, the room is becoming more crowded, with the likes of Netflix (NFLX), Amazon (NASDAQ:AMZN), Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) not only chasing market share but with some very deep pockets to achieve their goals. 

This lessens the availability of advertising time, let alone the political uncertainty which typified last year until the General Election, and which has now spilled over into this year, where the financial ramifications of the coronavirus are beginning to be understood. Unsurprisingly, the tourism industry has already been hit, and although ITV expects a 2% increase in first-quarter revenues this year, it is anticipating a 10% decline for April.

The investment in BritBox and generally lower advertising revenue have led to a decline of 6.5% in pre-tax profit, with any number of the key metrics suffering alongside. The net debt figure is high although manageable, and the general fortunes of the company will continue to rely on regular large sporting events, a benign economic environment generally and an ability to generate original and compelling content in the battle for eyeballs.

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This is not an easy menu of requirements and, even though some progress has been made, the company remains under pressure to perform, with the shares having dropped 15% over the last year, as compared to a 5% decline for the wider FTSE 100 index, and 17% over the last three months. The current share price of around 107p is a far cry from the 280p level last seen in August 2015, and competition will intensify from here. 

For all of this, the progress which has been made to date has been reflected in the market consensus if not the share price, whereby the general view has recently strengthened to a “buy”.