ITV moved back to the black in 2010, thanks to stringent cost controls and a recovering market. Not only did new CEO Adam Crozier and chairman Archie Norman report an 18% increase in advertising sales, they also sharply cut net debt. But this could be just the start.
ITV has 50 years experience of making top-flight programmes and possesses an immense back catalogue of quality shows. These include Coronation Street, The X-Factor and Champions League Football, which will continue to draw in vast audiences and can be sold around the world. Despite enjoying a 22.7% share of Britain’s viewers, the firm generates next to nothing from online and pay-per-view commercials – markets worth £5.7bn and £3.2bn respectively. Indeed, these opportunities dwarf the stagnant £3bn terrestrial advertising space.
Now, though, Crozier has just struck a deal with Sky to transmit its high-definition versions of ITV2, ITV3, and ITV4 exclusively on their satellite platform. And its IP-TV initiative – Project Canvas – in partnership with Channel 4, Five, BT and TalkTalk, has every chance of replicating the success of the BBC’s iPlayer and America’s Hulu for video-on-demand.
ITV (LSE: ITV), rated a BUY by RBS
Indeed, by 2015 ITV aims to lift other income streams and reduce its reliance on traditional advertising from 74% to 50% of sales. This should push up turnover by around £500m to £2.5bn – representing a top line growth rate of 4.5% per year. Assuming I’m right, ITV will be churning out earnings before interest, tax, depreciation and amortisation (EBITDA) of about £570m. Valued on a ten-times times multiple, adjusted for the debt and £449m pension deficit, and discounted back at 12%, that delivers an intrinsic worth of 70p per share.
What’s more, I’m convinced that after, say, two or three years, Norman hopes to sell ITV to the highest bidder. Being a coveted trophy asset offering huge synergies to trade buyers, such as Virgin Media, Disney, Endemol, or even Google, £1 per share could easily be achieved.
So what are the pitfalls? Free-to-air broadcasting is cyclical and revenues would come under pressure should we see another recession. Likewise, the proliferation of digital channels may continue to splinter audience sizes. That said, ITV offers a unique platform, an enviable production business, and holds one of the world’s largest archives. RBS has a 75p per share price target.
Recommendation: LONG-TERM BUY at 57p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments