ITV (LSE: ITV) surprised the market on Wednesday morning with half-year results that were better than expected. The shares rose and are up by 6% at the time of writing, at 113p.
Does today’s news mark the start of a recovery for the broadcaster and media group? As a shareholder I may be biased, but I feel very positive about the opportunity here. In this article I’ll explain why I’m so bullish.
Better than expected
One big number that’s closely watched by the market is ITV’s ad sales. Last year’s results were boosted by the World Cup, so this year’s figures were expected to be lower. However, advertising revenue only fell by 5% during the first half of the year, compared to previous forecasts in May for a 6% fall.
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Some of this decline was offset by an increase in online revenue, which rose by 18%. I think this number could rise much faster as the company’s digital transformation gathers pace.
Technology in the pipeline for the next 18 months includes a new recommendation engine for viewers and a programmatic advertising platform that will enable ad agencies to sell ads directly into the ITV Hub. Investment is also under way into other data-driven marketing activities.
Looked at a different way, ITV appears to be hoping to do for television advertising what Google did for internet advertising…
A whole lotta love (island)
One of ITV Studios most successful programmes so far this year is Love Island. The broadcaster says that each episode has averaged more than 5.5m viewers, gaining an 18% share of viewing.
To cash in on this continuing success, a second series of Love Island is planned each year from 2020.
ITV also hopes to cash in on the popularity of another service that’s popular with 16-34 year-olds — Netflix. The BritBox on-demand subscription service is a joint venture with the BBC that will launch later this year.
The company says it will provide “the largest collection of British Boxsets available anywhere”, tapping into new production and both companies’ huge archives.
Spending on BritBox will peak at £40m next year, before starting to fall. The cost is fairly modest compared to the money being spent by some rivals. If successful, it should help to reduce ITV’s dependency on external advertisers.
Do the numbers add up?
Overall, ITV’s adjusted operating profit fell by 13% to £327m during the first half. This was largely as expected. One reason for this is that ITV Studios’ calendar of new releases is weighted to the second half of the year, when revenue and profits should be stronger.
There’s no change to financial guidance for the year and CEO Carolyn McCall confirmed that she expects the firm to pay a dividend of at least 8p per share this year.
Although net debt continues to edge higher, I remain comfortable with ITV’s financial situation. I believe this business is attractively valued for investors, given its high profit margins.
A return to 200p?
Could the ITV share price return to 200p, a level last seen in May 2017?
I think this is possible, although patience may be required. At under 115p, the shares trade on about eight times earnings and offer a dividend yield of more than 7%. I think that’s too cheap, and continue to rate the shares as a strong buy.
