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ITV’s growth plans and digital transformation could make it an appealing recovery play over the longer term, writes Robert Stevens, CFA.
Last week’s interim results from ITV (LON:ITV) highlighted the challenges it faces, as well as the progress it is making in delivering on its strategy.
Revenue for the period declined by 7% when compared to the first half of the previous year, with a 5% drop in advertising revenue providing evidence of the uncertain operating environment that is currently present.
This looks set to continue in the short run, with the political and economic risks facing the UK being at an elevated level. This is likely to lead to continued weak demand for TV advertising, with the company’s EPS expected to decline by 1% for the full year.
While ITV’s near-term financial prospects may be disappointing, the company’s strategy has the potential to catalyse its long-term performance.
Notably, it is pivoting towards a digital future. A key part of this will be the release of its subscription video on demand (SVOD) service, BritBox, in the UK. It is a joint venture with the BBC that aims to complement existing streaming services such as Netflix.
ITV believes there is room for a British-focused streaming service, with annual growth in homes with any SVOD service being 20%. Moreover, a 34% rise in UK homes with multiple SVOD services means that over five million homes have more than one service. Crucially, this may mean that differentiating itself from rivals, rather than directly competing with them, may be sufficient to gain market share.
The business is also investing in its online video on demand service, ITV Hub. It provides the company with greater data on consumer behaviour, which affords greater marketing and advertising opportunities. The year-on-year doubling of subscribers to ITV Hub+, which is an ad-free version of ITV Hub, suggests that it offers long-term growth potential.
Alongside a digital focus, ITV has a strong pipeline of programmes within its Studios division. Although Studios revenue declined by 6% in the first half of the year, its deliveries are weighted to the second half of the year.
Since the company’s Studios segment generates the majority of its revenue from outside the UK, it provides diversity that may lead to a stronger business in the long run.
Cost reductions of up to £60 million are being targeted by the wider business between 2019 and 2022. This is equivalent to 13% of its fully addressable cost base, with a more efficient and nimble business potentially having a competitive advantage as technological change continues at a fast pace.
Although ITV faces a challenging near-term outlook due to difficult operating conditions, its P/E ratio of 7.5 suggests that investors may have factored in an uncertain future.
Moreover, its valuation could provide a margin of safety at a time when its strategy appears to be sound. While further financial and share price declines cannot be ruled out in the short run, the company could produce a successful recovery in the long run as it cuts costs and invests in digital growth opportunities.
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