Interactive Investor

ITV shows grace under pressure, and should gain from lockdown easing

9th March 2021 10:02

Richard Hunter from interactive investor

Broadcaster’s pre-tax profits dip, but outlook remains strong.

ITV (LSE:ITV) was unable to ride the wave of opportunity which lockdowns provided to some broadcasters, due largely to the nature of its business model, according to its full-year results.

In particular, the company is still heavily reliant on advertising revenue, even though the multi-year strategy to lessen this dependence is ongoing.

The advertising budget is often the first to give way. Many companies understandably pull back from advertising goods that they could not sell during lockdown, given the fact that costs became more of a priority.

A lack of major sporting events and fewer blockbuster programmes also added to the mix, let alone the ferocity of competition from large corporates with deep pockets, such as Disney (NYSE:DIS), Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX).

In all, total revenues declined by 16%. Within this figure, advertising revenue dropped 11%.

ITV Studios is the growth area of the business which the company hopes will replace the reliance on advertising. However, the pandemic all but halted production.

There was an inevitable effect on revenue, which fell by 25%. Overall pre-tax profit suffered a fall of 39% to £325 million as the two main drivers of income were separately affected.

Even so, there are certainly chinks of light at the end of the tunnel. Plus, in the meantime, ITV has worked hard to influence the factors within its direct control.

Cost savings of £116 million far exceeded the previous estimate of £60 million, with annualised savings of £100 million expected to take effect by 2022. At the same time, the company reduced net debt by 39% to now stand at £545 million. Its access to liquidity of £1.5 billion provides a further significant buffer if required.

The company is continuing its cautious cost outlook and, as such, the reintroduction of the dividend remains under review for a future date. While this was to be expected, the previously punchy yield will be missed by income-seeking investors, however prudent the decision may be.

Meanwhile, advertising revenue is expected to grow for the first four months of this year by 5% to 7%. There will be an estimated boost to income of 8% in March and 60% to 75% in April, against what will be a weak comparator.

In addition, ITV Studios now has 90% of programmes back in production despite the current restrictions. Its Subscription Video on Demand (SVOD) services are gaining traction, with a better than expected 500,000 BritBox UK subscribers contributing to an overall SVOD base of 2.6 million.

BritBox has already been successfully rolled out to the US and Australia, with South Africa to follow.

The pressure of the pandemic weighed heavily on the share price in 2020, and troughed in September, leading to ITV’s demotion from the FTSE 100.

Since then, however, the shares have moved into strong recovery mode as advertising and production trends improve, and have risen by some 90%.

Indeed, over the last year the shares now stand ahead by 19%, as compared to a gain of 21% for the wider FTSE 250 and the initial share price reaction to the results could even contain an element of profit taking, which is a relative rarity in the current environment.

As with so many companies, the return to some kind of normality will provide new opportunities and ITV should be no exception. It certainly retains some admiration in the eyes of investors, where the market consensus of the shares as a ‘buy’ has remained in place throughout.

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