ITV’s shareholders could be forgiven for thinking that they have seen this storyline before (Simon Duke writes). In 2009, when Britain last fell into recession, the broadcaster suffered a sharp drop in advertising income and was duly ejected from the FTSE 100. In March this year, marketing chiefs slashed spending and, by August, ITV again found itself demoted from Britain’s top index.
On the surface, the UK’s largest free-to-air broadcaster looks as vulnerable as it was a decade ago, despite costly attempts to be more resilient. Under Adam Crozier, its former chief executive, ITV bought independent production houses to strengthen its studios division, which makes programmes for both its own channels and rivals. In theory, this business should be much less prone to upheavals in the economy — yet it has proved anything but.
In the first half of the year, ITV Studios’ revenues fell by 17 per cent to £630 million — a performance only marginally more robust than its advertising business. On-air and online adverts generated £671 million in the first half, down 21 per cent year-on-year.
However, shareholders would be wrong to conclude that the strategy of bulking up in production has failed. The Covid-19 economic downturn cannot be compared with the slump that followed the financial crisis. Social distancing restrictions meant that ITV had to pull down the shutters on many of its productions. With no content to hand to its customers, ITV Studios inevitably suffered; it is paid only on delivery.
The outlook for the studios business is brightening. After several months of shutdown, Britain’s television production industry is cranking back to life. ITV Studios has resumed shooting on more than 80 per cent of the shows that it had to pause during the height of the pandemic. With hopes building for a tentative recovery in the advertising market, Dame Carolyn McCall, the chief executive, can steer ITV back into the FTSE 100 relatively quickly, provided, of course, that there’s no second lockdown.
Since succeeding Mr Crozier at the start of last year, Dame Carolyn has increased investment in ITV Hub, its online catchup service, which has had a surge in traffic recently. The former Easyjet boss wants to squeeze more from hit shows like Love Island through branded merchandising and other commercial tie-ins.
Her biggest move, however, has been Britbox, a subscription streaming offering launched with the BBC in November to compete with Netflix and Amazon’s Prime Video. ITV and the BBC are making original programmes for Britbox, including the revival of Spitting Image, the satirical puppet show, but until Britbox builds a bank of exclusive content, its mainstay will be shows from the broadcasters’ archives.
ITV is fighting to remain relevant, with a new cast of rivals, from the streaming services to YouTube and even video games. It has yet to publish Britbox subscription figures. In August, it said that it would lose between £55 million and £60 million on the service this year.
While Britbox is crucial to its future, ITV’s immediate prospects will be driven by its success in persuading advertisers to return to its channels. The signs are not as bleak as they looked even a couple of months ago. Yesterday ITV shares closed 3.3 per cent, or 2¼p, higher at 72¼p, lifting its valuation to £2.9 billion, after analysts at Citi raised their profit forecasts for this year amid “signs of optimism” among advertisers.
As confidence grows, ITV’s profits may recover rapidly. Citi predicts that pre-tax earnings will rise from £429 million this year to £553 million in 2022. For those who think that the economy will be resilient, ITV shares are worth a look.
ADVICE Buy
WHY Outlook for advertising spending is not as bleak as the ITV share price suggests
Virgin Money
It’s hard being any sort of bank these days, given the economic challenge of Covid-19, the era of historically low interest rates and regulators’ blockages on dividends (Katherine Griffiths writes). It is particularly tough being a medium-sized lender, denied the economies of scale of the big banks and struggling to offer services across the board rather than in a profitable niche.
Welcome to the world of Virgin Money. Yet despite the challenges, it is important that the company — created from its acquisition by CYBG, the owner of the Clydesdale and Yorkshire banks, for £1.7 billion in 2018 — finds a way to grow somehow, as it has slashed considerable costs and needs to expand with a structure that may be hard to shrink much further.
Virgin Money is trying to respond to its challenges. It is pushing for growth in unsecured personal loans and buy-to-let lending, where margins are better than in mainstream mortgages. The danger, as John Cronin at Goodbody, the broker, has noted, is that both increase the bank’s risk.
Virgin Money does have one point of differentiation from other banks. As part of the Virgin family — it pays a fee to Sir Richard Branson’s empire to use the name — it hopes to be able to slot banking into other services, from gym membership to air travel, as a way of widening its appeal. The notion is yet to be tested, given that the onset of Covid-19 seven months ago made business development difficult. Nevertheless, Virgin Money’s connection to a group of services beyond banking does mark it out from almost any other financial firm.
As tough as it is to be a bank now, it is also a time of opportunity. Change is afoot. In Spain, Caixabank is buying Bankia, while in Italy Intesa Sanpaolo is snapping up UBI. Sabadell, the Spanish owner of TSB in the UK, is exploring options, including potentially selling itself. Virgin Money’s management is focused on potential deals, which could mean selling but also may mean buying to enlarge the Virgin footprint in financial services.
ADVICE Buy
WHY Shares are down over 60 per cent this year, making them attractive as a bet on banking within the Virgin group or on chance of a deal
