Emerging from the lockdown is going to be tricky for ITV. Shooting intimate scenes for dramas at its production division is unlikely to be inspiring for either actors or the camera crew with rules governing social distancing in place.
At least as businesses begin to reopen as restrictions are eased — and sporting events return to the calendar — it should mean that the advertisers start to come back to the commercial broadcaster, whose revenues were decimated last month.
That must have been frustrating as its viewing figures have been up sharply with so many of us at home and thirsty for information and entertainment.
ITV effectively began life in 1955 when the first channel that aimed to turn a profit started up. Now the UK’s largest commercial broadcaster, the group was created in its current form in 2004 when Carlton and Granada merged. With a market value of £3 billion it is a constituent of the FTSE 100.
The group, probably best known for shows such as Coronation Street and Love Island, operates a string of television channels, a freeview and catch-up service and news and programmes online.
However, it has also garnered an increasingly strong reputation for producing high-quality dramas and other output at its ITV Studios division, which it either uses or sells to third parties including Netflix.
The group has a streaming joint venture with the BBC called Britbox that is designed to respond to changing viewing habits and to provide some competition to companies such as Amazon as well as serving them with content.
ITV has been producing programmes such as daytime chat shows and news throughout the coronavirus crisis — an impressive ten or so hours a day including Good Morning Britain and Loose Women.
It has begun shooting some dramas again, including The Chase in Germany and Australia, where a lot of restrictions have been lifted, and because it keeps shows as stock it is still broadcasting new episodes of Emmerdale and Coronation Street.
While it could start filming soaps again within weeks, resuming production of its high-end Studios programming is going to be more complicated and possibly more costly, reducing the effectiveness of its £1 billion annual budget.
Covid-19 struck at a particularly unfortunate time for ITV, which last year generated more revenues from its Studios division than from advertising for the first time, cutting its reliance on the vagaries of other companies’ spending decisions.
With sports on hold and widespread corporate shutdowns, the advertisers have stayed away during the weeks of crisis: ad revenues were done by 42 per cent in April.
The group has responded by cutting its expenditure, furloughing staff, reducing executive pay and cancelling bonus schemes, and dropping a final dividend that would have cost more than £200 million.
In ITV’s favour, there is demand for its shows among viewers. As output returns to more normal levels it is reasonable to believe that it can grow revenues at ITV Studios by the 5 per cent a year it hoped for.
With companies likely to want to broadcast that they are open again for business, the chances are high that the advertising imperative will be there and revenues will recover.
ITV’s shares, down 1¼p or 1.7 per cent to 72¾p, were avoided by Tempus because of the exposure to advertising. They carry no dividend yield for now but are very cheap, valued at 6.7 times Shore Capital’s forecast earnings. For those who believe the show can go on, they are a much more attractive proposition.
AA
On the most recent occasions that Tempus has looked at the AA — in December 2018 and November 2019 — it has recommended buying the shares.
Despite strong evidence that a turnaround at the roadside recovery group and insurer has been bearing fruit, the stock has continued to drop. It has fallen even further as the onset of coronavirus reduced both the number of drivers on the roads and emergency callouts.
The shares, down 1¾p or 6.5 per cent at 26p, have lost just under 90 per cent since being listed for 250p in 2014. Yet while Covid-19 might complicate life for the AA, it doesn’t alter the investment proposition. The simple truth may be that for many investors the company’s debt burden of £2.6 billion is just too high.
The AA was founded in 1905 to serve motorists. It has just over 3.2 million individual members who pay by subscription and a further nine million business customers.
Despite the crisis, the group has experienced some benefits. It replaced 27,000 flat or burnt-out batteries last month, way above its average run rate of 17,000, boosting its sale of parts. Having to tow away and store fewer vehicles has also reduced the AA’s garage bill.
Having managed to increase its membership last year, albeit by a meagre 0.2 per cent, the company reckons that the number will fall over the six months to the end of July before recovering. Assuming a staged return to normality, performance this year will be only slightly down on last.
Simon Breakwell, 54, chief executive, has delivered on all of his promises, increasing membership, raising profit and improving cashflow and insurance sales. The £2.6 billion debt burden, at just under nine times trading profits, is way too high, but the AA is slowly bringing it down and refinancing tranches. Thankfully it has no capital to repay until 2022. It states that it is in no danger of breaching its debt covenants and has just over £220 million in available credit facilities.
With the dividend suspended the shares have no yield, but they trade at a rock bottom valuation of 2.4 times Citigroup’s forecast earnings. The case stands.
Advice Buy
Why It should trade through this and bring debts down
