There’s only one show in town at ITV

In investment terms, ITV (LSE:ITV) has tended to be a tough watch, weighed down by the endlessly deep pockets of some of its competitors in the streaming space and the structural decline in linear advertising as viewing habits change.

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At the headline level, the numbers are mixed, with group revenues declining by 0.5% to £4.12 billion and adjusted pre-tax profit by 5% to £448 million. Cost savings of £63 million have cushioned some of the blow from the decline in advertising revenue, which itself came up against some tough comparatives given the Men’s Euros football tournament the previous year. Net debt rose to £566 million from £431 million, although still at a manageable level.

There are some signs of progress which has helped to lift shares at the open. Historically, the group had an equal weighting between TV advertising revenues and its Studios business and long since recognised that the gradual decline of terrestrial viewing would increasingly weigh on the former. ITV now reports that the majority of its revenues are coming from its content production and digital lines, demonstrating that a lesser reliance on traditional advertising revenues is being achieved.

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Alternative revenue streams such as the Studios unit and ITVX are showing signs of picking up the slack over the longer term. The Studios business has had a stream of quality content which it has been able to distribute both within the UK and overseas, with perennially popular shows such as Line of Duty made for other production companies. 

For Studios, total revenue increased by 5% to £2.13 billion with adjusted earnings dipping by just 1% to £297 million. External revenues was a source of strength, however, with a 10% increase highlighting the attractiveness of the unit.

Another area of growth is the ITVX unit, where digital advertising revenue spiked by 10%, bolstered by a 16% increase in viewing figures, with a more immediate target of £750 million in place to be achieved this year. The group previously noted that it expected to recoup the cumulative investment in ITVX by the time of these results, in which it has succeeded four years earlier than expected. In the meantime, total revenue fell by 5% to £1.99 billion and adjusted earnings by 6% to £234 million.

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Guidance for the coming year includes optimism ahead of the upcoming Men’s football World Cup tournament in the US, Canada and Mexico, which begins in June and where the group will be showing more matches and at peak times. As such, with some advertisers holding back their budgets ahead of the tournament, revenues, margins and profits are likely to be weighted to the second half of the year, with an adjusted margin in a range of 13% to 15% and further cost savings of £20 million estimated for the year as a whole.

In terms of the immediate outlook, however, there is perhaps only one show in town. ITV confirmed in November that it was in talks with Sky over a potential £1.6 billion sale of its Media and Entertainment business, which would include ITVX as well as its free-to-air channels. The shares spiked on the news, although engagement between ITV and Sky has reportedly slowed over recent weeks. It is possible that the price tag is the cause of the delay and a deal, should it happen, would basically leave the Studios business alone, perhaps itself then vulnerable to a bid, and in a best case scenario with its true value being unlocked by its solitary status.

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Aside from this potential break-up, a punchy dividend yield of 6.4% is an ongoing attraction. That being said, investors have been skittish on prospects, with ITV flitting in and out of the FTSE100 in recent times. Although the shares have risen by 12% over the last year, as compared to a gain of 14% for the wider FTSE250, the price remains down by 33% over the last five years. 

With more immediate prospects clouded by the Sky talks, a positive catalyst emerging elsewhere is not obvious and the market consensus of the shares as a hold is unlikely to improve as a result, despite the progress a streamlined ITV is achieving.