When the share price of a well-known brand plummets, it can be tempting to think you’re getting a bargain. Sadly, it often doesn’t end up that way. Nine times out of ten, shares are cheap for a reason.
ITV ticks many of the boxes of a value trap. It’s predominantly a linear broadcaster, in a world where streaming is king, and generates most of its money from advertisers, who have plenty of other ways to reach audiences and cut budgets when the economy wobbles.
Well-run companies adapt with the times. Unfortunately, ITV was slow to react and is now paying the price. The likes of Netflix burst onto the scene over a decade ago with great content and a more user-friendly way to view it. Now perhaps only the older generation are willing to sit in front of the box for hours waiting for their favourite shows to start and put up with endless advertising.
It took a while for ITV to get its act together. Initially, its only answer to upstarts eating its lunch with video-on-demand was the glitchy ITV Hub. Fourteen years later, a worthier online platform called ITVX was launched. In its first two months, ITVX attracted 1.5 million new registrations and registered 69 per cent more streaming hours compared with the same period a year ago. That’s an encouraging start, but these are still very early days.
ITV’s future hinges on producing enough quality content to draw viewers to its streaming service and regular channels. That is not as easy as it sounds, as competition is keen, and won’t come cheap. Total content costs are expected to reach about £1.3 billion this year, weighing on profitability at a time when advertising revenues are falling.
The hope is that ITVX will be self-sufficient in a few years. For that to happen, the broadcaster needs to hold its own against larger platforms with deeper pockets. ITV can’t afford too many setbacks, either. Investors are already running out of patience and won’t want to hear that ITVX is going to be a drag on cashflow and potentially kill off the dividend.
In its defence, ITV does have a huge library of great shows loved not only in Britain but all over the world. Advertisers cannot ignore that and will be aware that ITVX makes these programmes more accessible. Another advantage is that ITVX can be watched free with advertising. That option could prove particularly handy in the current economic environment, with rampant inflation forcing cash-strapped households to cut back on non-essential spending.
Are these various observations reflected in the share price? That depends how optimistic you are. There’s been talk for years that ITV would make a great takeover target and could be bought for a fraction of what the big streamers spend annually on content. There’s also the argument that ITV should be valued as a content producer rather than a cyclical broadcast business, considering that its production arm, ITV Studios, accounts for nearly half of group revenues and keeps on growing. An analyst at Citigroup even suggested this business, which also sells content to other streamers and broadcasters, on its own is worth ITV’s current market price.
While the above points shouldn’t be entirely dismissed, they aren’t persuasive enough to build a solid buy case at this juncture. Last November, the shares could be bought for five times forecast earnings. Now that multiple has doubled to 10. ITV is a decent brand with a good following. But investors should be paying less than the usual going rate considering the current economic environment and other myriad challenges faced.
ADVICE Avoid
WHY ITV has a lot of hurdles to overcome, investors are running out of patience and the current asking price is too steep to stomach all that
Synthomer
Delaying the publication of financial results can lead people to fear the worst, especially when it’s a company in as big a mess as Synthomer.
The Essex-based chemical-maker, whose materials are used in everything from medical gloves, insoles and artificial turf to coated paper, bindings for carpet and foam mattresses, is now due to update the market at the end of March rather than at the beginning of the month as initially expected.
Synthomer is paying the price for some poor decision-making. During the Covid-19 pandemic, sales of its protective equipment were booming and management got a little bit carried away, forking out $1 billion (£760 million) on an acquisition not too long after completing another deal for $824 million.
Since then, everything has gone a bit pear-shaped. The economic climate turned sour, the rubber gloves boom went bust and interest rates soared. For Synthomer, that’s translated into lower profits, a very strained balance sheet and a 70 per cent fall in its share price.
Management is now on a clean-up job. Other than securing a bit more flexibility from lenders, Synthomer suspended dividend payments, culled capital spending, initiated a cost-saving restructuring drive and put its non-core, more cyclical businesses on the market, one of which was recently sold for about $250 million.
What would also help is an upturn in trading prospects. The current situation isn’t great, although gas prices retreating and the reopening of China do offer a small glimmer of hope.
That begs the question: Is the sell-off overdone? The glass-half-full argument is that the shares, which trade at an unusually low seven times next year’s forecast earnings, have bottomed and that Synthomer’s goal to grow the “speciality” side of the business will yield greater profits and less volatility.
Sceptics, conversely, can contend that trading conditions remain woeful and that fire sales, or perhaps even a deeply discounted rights issue, may be required to steer the company back on the right track.
Unless you’re feeling particularly brave, it might be worth sitting this one out and waiting for more clarity.
ADVICE Avoid
WHY Synthomer isn’t out of the woods yet
