It wasn’t the size of ITV’s election night audience figures that pushed shares in the blue-chip commercial broadcaster sharply higher last Friday. Stock market investors concluded, perhaps understandably, that an 80-seat majority for the Conservatives would usher in a period of political and economic certainty and release potentially billions in pent-up business investment.
In the case of ITV, whose shares gained 5.8 per cent during the day’s post-election bounce, dealers extrapolated that it would mean the advertisers who had sat nervously on the sidelines for the past several years would now start to return.
The euphoria may have been tempered when Boris Johnson moved to rule out requesting a Brexit extension. Yet the sentiment, and the latent optimism, remain.
ITV was created in all but name in 1955, when Independent Television was launched to provide commercially driven competition for the BBC. In its current form the group was created in 2004 through the merger of Carlton and Granada.
As Britain’s biggest commercial broadcaster, it operates traditional TV channels under the ITV brand, as well as a freeview service and catch-up option. It has its own studios, which produce material to broadcast on its network and for sale to rivals, including the BBC and Netflix. As of earlier this year, ITV also has Britbox, its subscription-based streaming service joint venture with the BBC, designed to counter the threat from the likes of Amazon.
As a commercial broadcasting operation, ITV feels difficult to fault. It combines longstanding favourites, such as Coronation Street with fresh and original dramas such as Manhunt and films including Snowpiercer.
Battling against changing viewing behaviour and the multibillion-dollar output of the streamers is always going to be an uphill struggle, but ITV has at least given itself a fighting chance.
Revenues from ITV studios have been growing and the group is confident that over the medium term, which tends to mean three to five years, turnover will grow at a compound annual rate of at least 5 per cent and with margins running at between 14 per cent and 16 per cent. The problem, though, is advertising, tough to win in the good times and seriously problematic when the economic signs are pointing in the wrong direction.
ITV’s total ad revenues, which account for a little more than half its overall income, were up by 1 per cent last year but down 3 per cent over the nine months to the end of September and are forecast to be 2 per cent lower over the full year.
Arguably, the year when Brexit was supposed to happen should be seen as an anomaly, when commercial sentiment has been plagued by uncertainty. The market bulls would have investors believe that a clean Brexit will change all that and that the release of frozen business spending will mean the bookings roll in.
While the basic logic of the argument seems to have some merit, it feels more likely that in practice the way that Brexit and the UK’s economic fortunes play out will be much muddier. Unless Britain is magically poised unaided to plunge into a sustained period of growth at a canter, the same pressures on the ad buyers, from supermarkets to car manufacturers, will surely persist. Likewise the competitive threats.
ITV’s shares, off ½p, or 0.36 per cent, to 151½p yesterday, climbed by 12.8 per cent since this column recommended avoiding them in March. They trade for 11.8 times Barclays’ forecast earnings for a rich dividend yield of 5.4 per cent, but this columnist remains unconvinced.
Advice Avoid
Why A big bounce in advertising revenue feels unrealistic and earnings growth at ITV Studios is hardly stellar
Renewables Infrastructure Group
The Renewables Infrastructure Group is starting to flex its muscles in the world of green energy investment.
As well as making five sizeable wind farm acquisitions since this column last looked at the stock in March, the investment vehicle has twice raised funds through new share issues and proposed a further sale of shares.
It has also won approval from shareholders to invest more of its assets, up from 50 per cent to 65 per cent, in renewable energy projects outside the UK, in ventures in Germany and Scandinavia, among others, that tend to be larger and more ambitious.
The group, which is known as Trig, was created in 2013 as a closed-end investment company that aims to generate capital growth and income for shareholders by investing in a diversified collection of projects, primarily solar and wind farm infrastructure in the UK and continental Europe.
It invests by buying either a stake in a completed project or the whole venture and, with just over 70 investments in its portfolio, in return it receives a proportion of the revenues made from the power that is subsequently sold to the grid.
This year it has bought wind farms, both offshore and onshore, in Sweden, France, Germany and Britain.
There is much to commend this investment company, particularly for those keen to use their capital to back alternative sources of energy.
Prospective investors should bear in mind that, given how rapidly Trig is expanding, it is highly likely that it will regularly raise capital through share issues and that opting not to take part in them would risk diluting their holdings.
The shares, higher by ½p, or 0.5 per cent, at 133¼p yesterday, have gained 14.3 per cent since this column advocated holding them in March. Technically, they trade at a premium of about 15.8 per cent to the most recently disclosed net value of Trig’s assets but, given that the vehicle only values its assets twice a year and makes such regular acquisitions, in practice the gap is considerably smaller. With a yield of 5.1 per cent, it’s time to upgrade them to a long-term buy.
Advice Buy
Why Well priced and feeling the benefits of scale
