ITV, a growth opportunity now at a price well underpinned by fundamentals.

24th Jul '16 by janebolacha

43 comments 22999 reads

ITV (LON:ITV) is due to isssue its interim results on Wednesday, July 27. This is a stock I have been following for quite some time and which I see now as an attractive investment opportunity. Should there be a note of caution in the outlook statement on Wednesday with respect to UK short-term advertising revenues, as some analysts have hinted, and that leads to the share price slipping a little, that would, for me at least, be an opportunity to increase my holding.

I have been building up a stake in ITV (LON:ITV) only since it dipped below 170p in the wake of the EU referendum result. I started buying then after following it for quite some time and did so because the fundamentals seem to be good, because it is a company which reports in a very clear way and which I find easy to understand, because the management has a good track record and a clear and clearly-expressed strategy, because I took and maintain the view that the EU referendum result will not lead to there being a major or a lasting impact on the growth drivers of its business and because I see several possible kickers which are not, imo, reflected in the share price.

The fundamentals are:

A PER of just over 11.
A dividend on 2015 results of 6p plus a special dividend of 10p, corresponding grosso modo to the year's FCF.
A business which is highly cash-generative.
A ROCE of 31.7%, a ROE of 46.5%, an operating margin of 22.4%.
A dividend cover of almost 2.
A very sound Balance Sheet.

An excellent analysis, from February 2016, of these fundamentals and with a historical perspective is this one by Phil Oakley of ShareScope:

https://www.sharescope.co.uk/philoakley_article74_f.jsp

The clarity and depth of ITV 's reporting is exemplary. Here is their last results RNS, for 2015:

http://www.stockopedia.com/share-prices/itv-LON:ITV/news/rns/160302itv7134q.htm/?title=preliminary-results-year-ended-31-december-2015

From the detail given, one is able to understand in depth the business and its drivers. By that I mean not only the financials but (equally importantly for me) the present and future shape of the business and the strategic direction the management have mapped out for it.

(That degree of detail must be…

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kalkanite

25th Jul '16

Great and very thorough post Jane, thankyou.

Carcosa

Excellent post Jane; I wouldn't expect anything less ;-)

In regard to STV, the Crystal Amber Fund's last prelims (pre Brexit) gives a good overview::

STV (LON:STVG) has exclusive access to ITV Network’s material in Scotland in return for an affiliate fee that represents around 50 per cent of STV’s cost base. ITV controls about 45 per cent of TV advertisement sales in the UK, so STV has engaged it to sell its national airtime. STV’s national airtime revenues are linked to the content’s success, that is, its viewing performance relative to other channels. STV's peak time share has remained above ITV's for five consecutive years. STV generates 65 per cent of its £120 million revenues from national airtime advertising, and 10 per cent from Scottish airtime advertising. Nearly 90 per cent of its £20m operating profits come from advertising and sponsorship. Over the last decade, and despite the rapid growth of digital advertising, TV’s share of the advertising market has remained broadly stable at 40 per cent of total spend, and similarly TV viewing has remained stable at an average of around 4 hours per day.

By 2010 all of STV’s non-television assets had been sold off. From its past, STV retained hefty tax losses and a legacy pension deficit from an acquired company. New management set a clear strategy of optimising the TV operation and growing TV production and digital revenues. STV produces over 160 hours of TV content for external commissions. Whilst this might be a necessary component of a broadcaster, it has so far failed to make a material contribution to profits. Digital revenues have made more progress. With the goal to further its consumer engagement and reach different demographics, STV has developed a family of products which complement on-air TV, including its own on-demand player, live online TV, local TV and city apps. Unlike other broadcasters who developed their own players at great expense, STV partnered with third party providers. STV's digital products have captured data insights from around 20 per cent of Scotland's population. The company has started monetising this data and digital, principally from the STV Player, now contributes 4 per cent of group revenues and 8 per cent of operating profits. It is expected to continue growing, as broadcasters are well positioned to capture online video advertising revenues leveraging their quality video content.

Recently, STV has set new targets for 10 per cent annual earnings per share growth for the next three years. Its new local services for Glasgow and Edinburgh are now a small drag on returns but should break even in a year, delivering incremental revenues with little additional capital spend, and leveraging advertising sales teams. Scotland's Independence referendum in 2014 placed STV at the centre of political events, and reinforced its brand. With net debt to EBIDTA reduced to 1.2 times, down 35 per cent from its level when the Fund invested, STV has returned to the dividend list. In our view, dividend growth is likely to accelerate as the company has little material need for cash. The current market capitalisation of £170 million, in our view, fails to reflect the quality of this asset.

Ramridge

27th Jul '16

Well done, Jane. My quick assessment this morning is that the results are very strong and either in line with, or slightly ahead of broker expectations.
The only negative (and it is small) is that net debt has gone up from £319m to £796m. But the debt/ EBITDA ratio is only 0.9, so plenty of headroom for more acquisitions.
I bought a few last week on the back of your analysis - so a thanks from me.

janebolacha

Ramridge,

You're very welcome.

I found the investment case convincing (and still do at close to 200p).
I bought quite a few more on Monday and Tuesday at between 184p and 187p
and will be holding since I continue to see the stock as very soundly underpinned
and the growth drive factors still very much under-appreciated.

Best wishes,
Jane.

cig

28th Jul '16

It's a somewhat compelling pitch, but I can't help thinking they may lose out to the "content wants to be free" macro trend in the end, eg who needs Endemol when billions of people can film their equally uninteresting lives with their smartphone and post it on YouTube, hoping for a little bit of fame?

Cig, the narcissistic and ephemeral "phone in front of face" generational phenomenon appalls me
but that's the way of the world. Media companies have to respond to that through devising mobile
platforms, using their content as the attractive platform for advertising. That's what ITV (LON:ITV) are doing.
Mobile and fixed platforms are complementary. Content "to go" ? Yes, perhaps it resembles a
latte "to go" or a "big mac" to go. If that's the way it is, then demand for content will continue to grow.
That's what ITV (LON:ITV) are responding to with their content strategy and their digital strategy. It seems a
sensible business strategy. in fact one could say it is a strategy the market is imposing on media
companies and broadcasters. The narcissistic "look at me" stuff is arguably simply incidental.
Looking at total spend as simply two facets of a common market opportunity is perhaps the way
forward, certainly in respect of income, aka advertising spend, which is what drives content.
Note particularly this comment below:

" i.e. advertising expenditure across all media except digital search and classified. In 2015 television and online video accounted for 48.5% of global display, up from 43.8% in 2010, and by 2018 we expect them to account for 49.6%."

"MOBILE TO BECOME THE MAIN PLATFORM FOR ONLINE VIDEO IN 2016

18th July 2016/in Blog, Press Releases /by Jonathan Barnard
This year mobile devices will overtake ‘fixed devices’ to become the main platform for viewing online video, according to Zenith’s Online Video Forecasts 2016, published today. Consumers around the world will spend an average of 19.7 minutes a day viewing online videos on their mobile devices (smartphones and tablets), compared to 16.0 minutes on fixed devices (both desktop computers and smart TV sets). This represents a 39% leap for mobile on last year’s figures, when 14.2 minutes were spent viewing mobile video. Fixed video consumption will be static this year, reflecting higher viewing on smart TVs counterbalanced by the viewing lost from desktops to smartphones and tablets.

This is the second edition of Zenith’s Online Video Forecasts report, which is published annually. It contains historical data and forecasts of online video consumption and advertising, together with commentaries on the development of individual markets by local experts. This year’s edition covers 57 key markets, up from 40 in the first edition.

The rapid growth in mobile video consumption is being driven by the growing popularity of mobile devices, particularly low-cost devices in lower-income countries; the development of better mobile displays; and the spread of high-speed data connections, particularly 4G. We forecast mobile video consumption will grow 33% in 2017 and 27% in 2018, to reach 33.4 minutes a day. Mobile devices will account for 64% of all online video consumption in 2018. Fixed video consumption will grow 13% in 2017 and 3% in 2018 to reach 18.7 minutes as smart TV viewing becomes more common.

Online video adspend to grow 20% a year

Advertisers spent US$17.5bn on online video ads in 2015, up from US$13.4bn in 2014. We forecast online video adspend to grow at an average rate of 19.8% a year, reaching US$30.1bn in 2018. This will increase online video’s share of digital display adspend to 31.3%, up from 26.7% in 2015. Online video (as well as social media) is rapidly taking market share from traditional banners, which are less effective and more disliked by consumers, particularly on mobile devices.

Most video adspend will be fixed until 2018

Although most online video consumption is mobile, the majority of expenditure on online video advertising goes to fixed devices, and will continue to do so in 2017. We estimate that fixed video ads will account for 68% of all online video advertising this year, down from 75% last year. It’s not until 2018 that we expect mobile advertising to equal fixed. Video ads are more engaging and effective on larger screens, so advertisers will continue to pay a substantial premium for fixed video ads.

Online video advertising complements television

In many markets it is becoming common for brands to treat online video as a complement to traditional television, rather than as a competitor. Online video can add incremental reach to television campaigns, particularly among the young and well-off consumers who tend to be the heaviest users of online video. In smaller markets, advertisers often simply reuse their television ads, but this is not the most effective way of using online video: online video ads normally work better when they are shorter than traditional 30 second spots. Some brands have found success by using online video to provide extended content to interested consumers – by extending the story of the television campaign, for example. As we have noted in our Advertising Expenditure Forecasts reports, television and online video are increasing their combined share of global display advertising – i.e. advertising expenditure across all media except digital search and classified. In 2015 television and online video accounted for 48.5% of global display, up from 43.8% in 2010, and by 2018 we expect them to account for 49.6%.

“The spread of mobile devices and high-speed connections means consumers will have online video content at their fingertips throughout the day.” said Jonathan Barnard, Head of Forecasting at Zenith. “This creates new opportunities for advertisers to communicate with consumers, using online video ads to combine the brand-building power of audiovisual advertising with pin-point targeting and personalization.”

http://www.zenithoptimedia.com/mobile-become-main-platform-online-video-2016/

Will the demand for manufactured video content grow? Not obvious to me.

First the demand unit is essentially "eyeball hours" in which ads can be shown. When people switch from one screen (TV) to another (mobile) the aggregate demand is unchanged. It only increases if people spend more hours watching videos at the expense of something else. Mobile being available in previously dead time (eg on the bus) that helps, but it's also a route to competing media forms (people going for games, written word, music, etc instead of video).

So okay let's assume demand for video content grows, will it be old school manufactured content or will some of the new demand, and perhaps some of the legacy demand as well, be absorbed by free content? For that I'd simply suggest looking at yourself as a content producer: this morning I had a couple of hours to consume financial news, that demand is more or less fixed. In the old days I would have spent all the budget on reading the FT and watching say Bloomberg TV. Today I still read a bit of FT and Bloomberg material online, but I also read some of the content you produced and published in the form of Stocko comments. You are basically competing with paid staff at Bloomberg and the FT and doing that very well indeed, as the quality of your production is as good or better as the incumbents' (labour of love vs. just a job...). Your reward for your efforts is attention (admiration and interaction) and it seems enough to keep you (and many of us) producing. My thesis is that the same sort of phenomenon applies in video as it does in print, music, etc and thus being an old school manufactured content producer is a perilous place to be.

I have to say that I am astonished by the quantity and quality of content that is freely available on the net.
For example if I want to know how to change a washer in a tap, there are a number of youtube clips by professional plumbers showing you in great detail how it is done.
And again as an example, there is a lot of business research freely available today; stuff that the same companies were charging a lot only a few years ago.
But can I then extrapolate and say that one day someone will make available free (money or advert) something akin to The Americans or NCIS series, say? I don't think so.
There will always be a need for content producers for high quality content that people will pay for, directly or indirectly through ads.
So to me the battle is not about free vs paid-for, but the shape and form of content that will suit consumers in the future and for which they will be willing to open their wallet.. Already in the US 35% of the population has what is dubbed the trio, i.e. mobile, tablet and laptop. Viewing habits are changing dramatically. This mega-trend is shaping the dynamics of content providers such as ITV, and channel distributors.

Cig, you have paid ads (far too many!) on Bloomberg, to get full access to the FT or WSJ you need to pay a subscription, the same for The Times or The Telegraph. People take out pay-tv subscriptions or they pay extra for sports, movies or on-demand options. Actually, we also all pay for full access to Stockopedia where people like us contribute and share content for a mercenary purpose, that is, to make money through improved investment performance. So I and we do have a real reward, in money terms, it isn't really done for "free". It nearly all has to be paid for,, in one way or another. Yes, there is the group narcissism of Facebook (now with loads of ads), the nonsense of Twitter and the vast amount of information available online but all that does not come free, often it is prefaced by ads but in any case its availability does depend, in the last resort, on the payment of a phone subscription. The aggregate number of "eyeball hours" has actually increased substantially, particularly among "millennnials", even if the time spent viewing traditional tv has flatlined or diminished a little. What remains unknown is whether this viewing behaviour will change as this generation ages or as their life circumstances change. I believe that, at present, for content producers such as ITV (LON:ITV), what has changed is principally the content delivery mechanism and that their task is essentially the same, to devise relevant and attractive content and deliver it in the way to best reach the biggest audience. Up to now, at any rate, ITV has been up to the task.

oscar247

2nd Aug '16

Jane

Many thanks for such an in-depth and persuasive analysis.

I'd value your views on ITV's ability to fight off such competitors for audience and advertising revenues, such as FX, Netflix, Amazon, and HBO? The monies these companies are investing in original content productions, to attract and grow market share is truly staggering. Netflix, (with over 5 million UK subscribers, outpacing both SKY and Amazon) alone has budgeted in excess of $5 billion for this years production of original content programmes!
Also note, Apple and Microsoft are poised to enter the online streaming television market, too.

A bearish view, in light of such notable growing competition, is that of ITV's future audience figures are set to continue declining......... faster, further and more significantly. These headwinds seem to be feeding the markets worries over ITV's future fortunes and may explain why the share price has weakened over the past eight/nine months.

Yes, you are quite right, ITV (LON:ITV) is in one key market, the content market, dominated globally by the really big boys, some of which you mentioned, companies with staggering budgets. I do not actually see ITV as competing head on with them. I do see ITV as building its own niche in content, one they seem to have identified as unscripted situational content, perhaps illustrated by the purchase of Talpa Media and the bringing on board of John de Mol, the creator of "Big Brother". It's worth noting that ITV America is already the biggest producer of such unscripted content in the US. That ambition seems to be measured, reasonable and achievable. Besides that, their other main thrust in niche content seems to be in what one could perhaps call visually chic and tasteful nostalgia, of the "Downton Abbey" kind, something that seems to have a proven and ready market, particularly in the US. There have been rumours in the last few months of ITV being interested in Entertainment One (LON:ETO), the 85% owner of the Peppa Pig franchise, something that could provide a third niche, in children's programming. That niche approach seems to me to be sensible and realistic for ITV, given that they would never, as an independent company, be able to take on players such as those you mention (and there are others!).

In respect of UK eyeball views, as you undoubtedly know, tv viewing seems to have plateaued while online and, particularly, mobile are now the growth sectors. For me, ITV could have been rather faster in addressing this change in the market. Nevertheless, we are where we are and they are now doing so. Of course, this change in how and where eyeballs view actually brings us back to content as the name of the game. No longer are people limited to being glued to their armchairs or sofas (no more fights over males hogging the remote control, either, a great side-benefit!).

So it is all about content, at least in terms of substantial growth. That's one of the reasons I found the market reaction post-23/6 really puzzling, the share price seemed to tank as if ITV was as exposed to UK tv advertising as it had been in 2008/9, really way behind the curve.

I would say that the days of ITV (LON:ITV) as an independent company are probably numbered. I am aware that such a prediction is not new. However, now that the really big boys are involved and, particularly, with the blurring of any boundaries as to technology (just think, Amazon, Microsoft, Comcast NBC-Universal, Liberty Global, Netflix, etc, etc, very different companies with different delivery systems), and with content thus becoming key, it may now be closer.

Simply my own thoughts.
As always, DYOR and GOOD LUCK.

Jane

Greatly appreciate your taking time out to reply and so comprehensively.

Certainly agree, reading your comments regarding ITV interest in Entertainment One (LON:ETO) as capturing niche programming producers would certainly give some added attraction to the companies current offer. Continuing on that theme, I'd bring to your attention Chrysalis VCT (LON:CYS), which unlike many VCT has made very attractive returns for shareholders since its conception. Amongst its top ten investments:-

"Coolabi is a leading independent, international media group and rights owner specialising in the creation, development and brand management of children's and family intellectual property rights."
Coolabi has recently brought back the Clangers to the television screen every weekday on Cbeebies at 5.30pm.

Kind regards

8th Aug '16

Hi Jane
Interesting interview with Reed Hastings of Netflix published in yesterday's Sunday Times.
Basic take-away for me:
- internet TV will continue to grow strongly and take away customers from conventional broadcast TV
- content has always been king, but in future this will be doubly so
- this financial year they will be spending 5bn $ on content: combination of commissioned + co-productions + licensed from others

Their main rival in the US, HBO, also moving in the same direction through acquisitions and own productions

This is precisely where ITV is positioning itself. ITV and Netflix are already co-producing a series.

Based on this article, I increased my holding in ITV this morning. At less than 200p a share, it still looks cheap. HBO is owned by Time Warner which has a market cap of around £80bn $,. I reckon that ITV is well within its range as a potential target.

All in IMO and please DYOR

Hi, Ramridge.

You might be interested in this article from "Seeking Alpha", from yesterday.
It's really on Comcast-NBC Universal but the content theme in the industry runs through the article.

http://seekingalpha.com/article/3996913-comcast-acquistion-vertical-integration

(Edit: A theme perhaps amplified by this "Harry Potter" deal, also by Comcast-NBC Universal):

http://seekingalpha.com/news/3200902-nbcuniversal-...

Best wishes and good luck in your investing,
Jane.

Thanks, Jane.

PJ0077

The IAB (Internet Advertising Bureau) would appear to have slashed their growth forecasts for tv advertising spend : the 2017 forecast has been lowered by almost 40percent:

http://www.iabuk.net/about/press/archive/uk-adspen...

Analysts meanwhile have been downgrading their ITV estimates since April:

I suspect that this will be a bumpy ride in the absence of M/A activity?

PJ0077,

There's far more to ITV (LON:ITV) than simply UK tv advertising revenues, as I explained in my original post of July 24 and as is clear from the company's results announcement in their RNS of July 27. The latter is well worth a detailed read, imo.

Still, it's a matter of the personal appreciation and judgement of each one of us, that's what makes for a market.

Good luck with your investing,
Jane.

1st Sep '16

Ramridge (and others interested in media stocks),

You might find of interest this extensive report from Boston Consulting Group on "The Value of Content", commissioned by Liberty Global (10% shareholder in ITV ). There's an awful lot to digest here but it's well worth the read, imo.

https://www.libertyglobal.com/pdf/public-policy/The-Value-of-Content-Digital.pdf

Best wishes,
Jane.

LongbeardRanger

Jane,

Thanks for the heads up. This looks a really interesting document.I too am interested in media stocks, so will read it in detail.

There is a (strong) argument that providers of content will suffer as the internet pushes more and more content into being provided free (Cig outlines this case above), however, I am not convinced. It seems to me that the internet is very very dangerous if you're a transmitter of content - but it has the potential at least to be highly positive for genuine creators of content.

I've not formed a full view on this myself, so will read the BCG doc with great interest.

Rgds

Phil

ITV, a growth opportunity now at a price well underpinned by fundamentals.

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Janebolacha

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