ITV is one to watch – and buy, says Phil Oakley.
The business
ITV is the largest commercial television network in Britain. It has five television channels: ITV 1, ITV 2, ITV 3, ITV 4 and CITV (Children’s ITV). These are broadcast free-to-air across various platforms. These channels make money by selling advertising slots and also from the sponsorship of TV programmes.
ITV receives similar income streams from its online business. This is centred on the ITV.com website and ITV Player, which offers television programmes on demand. ITV Studios makes programmes for ITV but also sells them to other countries. ITV had sales of £2.1bn in 2011.
The history
ITV began life in 1955 when it started broadcasting on channel three in the London area. By 1973 there were 15 regional ITV licences in Britain, with each licence run by a separate company. This remained the status quo until the early 1990s when Granada and Carlton set about buying up regional ITV firms. By 2001, they owned 11 of the 15 licences. In 2004, Granada and Carlton merged to form ITV plc, having previously co-operated on a number of ventures.
ITV has a chequered history. It has continually had to battle the ups and downs of the advertising market while coping with burdensome public-sector broadcasting obligations. It’s also made a number of high-profile mistakes, such as its ITV Digital venture, which failed to create a credible pay-TV business, and its acquisition of the Friends Reunited website, which it later sold at a loss.
The growth of the internet and powerful rivals such as BSkyB and the BBC haven’t helped matters. Several CEOs have tried to put ITV on a firmer footing during the last decade, but seemed to end up running hard to stand still. However, the current turnaround plan under the leadership of Adam Crozier does seem to be bearing fruit.
The chief executive
Crozier has been CEO since 2010. Before that he had held high-profile jobs at organisations including Saatchi & Saatchi, the Football Association and Royal Mail. His seven-year spell at Royal Mail was particularly eventful, with Crozier hailed by some for taking the business from losses to profits, and loathed by others for closing thousands of post offices and ending the second post and Sunday collections. Last year he was paid £1.5m.
Should you buy the shares?
ITV’s profits are very sensitive to changes in advertising revenues – there’s no getting away from that. This is not something that is going to change quickly, but could ITV’s turnaround strategy actually work this time? There are some promising signs. Underlying sales growth at ITV Studios has been building for the last couple of years as more of its programmes are sold overseas. It is also supplying more of ITV’s own output, which should help profits. ITV also has a good line-up of entertainment, drama and sports programming that remains popular with British households. This means that it cannot be ignored by advertisers.
ITV’s immense TV archive also offers significant profit potential. The growth of on-demand TV is well suited to monetising this asset, as recent deals with the likes of Netflix, LoveFilm and Sky demonstrate. A pay version of the ITV Player could also make money in this area. Throw in some further cost savings and ITV could deliver some decent profit growth going forward.
The company’s pension fund deficit is a slight concern, but is being addressed. Otherwise it has impeccable finances with net cash on its balance sheet, having got rid of nearly £1bn of debt during the last three years. ITV now looks a lot less risky for investors, yet trades on a modest multiple of expected profits.
As long as the advertising market does not collapse, the company should keep producing good cash flows while remaining a significant broadcasting asset. We think the shares are worth buying.
The numbers
Stockmarket code: ITV
Share price: 87p
Market cap: £3.4bn
Net assets (June 2012): £807m
Net cash (June 2012): £92m
P/e (current year estimate): 10.4 times
Yield (prospective)2.7%
What the analysts say
Buy: 14
Hold: 5
Sell: 6
Average price target: 90p
Directors’ shareholdings
A Crozier (CEO): 295,907
I Griffiths (FD): 881,852
A Norman (Chairman): 971,584