STV Group – record revenues point the way

Today I return to a company that I first profiled in April two years ago.

I thought then that its shares looked cheap, but after having collapsed in price due to Covid-19, I now consider them to be even more appealing.

Furthermore, I reckon that they could well show a short-term 25% gain in price and then still appear inexpensive.

The business

The Glasgow-based STV Group (LON:STVG) serves its audiences, north of the border, with news, entertainment and drama.

The company delivers its content on air, online, and on demand.

It also provides internet services, as well as selling advertising airtime and space in its media.

Together with its subsidiaries, the group produces and broadcasts television programmes in the UK.

Three main business segments

Some 3.2m viewers each month tune in to STV, the group’s free-to-air broadcast channel which is accessible on all the main TV platforms in Scotland.

The company’s STV Player is the UK’s fastest-growing video on demand broadcaster. It is pre-installed in over 75% of the UK’s connected TV homes, through SkyQ, Now TV, Virgin Media, Amazon Fire TV and Freeview Play.

It boasts having over 150 boxsets available through its content library, as well as over 3,000 hours of quality drama, fact, sport and entertainment series.

STV Studios, is Scotland’s biggest production company and is one of the UK’s top content providers. It handles commissions for BBC One, BBC Two, ITV, Channel 4, Channel 5, BBC Scotland, Discovery, VH1/MTV and Sky One.

Revenue creation

The group splits its advertising revenues up three ways.

Its National Advertising is worth some £75m to £80m in annual revenue, it is sold by ITV and gives the group a guaranteed share of national spot and sponsorship.

Regional Advertising creates some £15m pa and is sold by STV itself, through regional spot and sponsorship partnerships.

The Digital Advertising revenue is growing very fast, now at around £15m a year, sold by STV, derived through video on demand advertising on STV Player, together with digital sponsorship and display.

Recent year’s results

In its trading year to end December in 2019 the group reported £123.8m of revenues and adjusted pre-tax profits of £21.0m.

Last year the effect of the pandemic saw revenues down 14% to £107.1m, while adjusted pre-tax profits were 21% lower at £16.6m.

Just a few days ago

Recovery is truly on its way.

At the start of this month the group issued a Trading Update that shouted very loudly that it was blasting on all cylinders.

Simon Pitts, the STV Chief Executive, stated that: “The speed and scale of the advertising recovery in 2021 has far exceeded our expectations and underlines the enduring power and relevance of high-quality video advertising.
“2021 will deliver STV’s highest ever advertising revenues, with brands choosing broadcast and video on demand advertising to boost their post-Covid recovery due to its unrivalled levels of trust, brand safety and value.”

Strong institutional following

There are 46,722,499 shares in issue.

Larger holders include Slater Investments (16.0%), Aberforth Partners (10.4%), Threadneedle Asset Management (7.62%), AXA Investment Managers UK (6.93%), M&G Investment Management (5.81%), Chelverton Asset Management (5.51%), Schroder Investment Management (4.46%), Canaccord Genuity Wealth (4.28%), Octopus Investments (4.00%), and Sanford DeLand Asset Management (3.72%).

Broker’s View

Analyst Roddy Davidson at Shore Capital, the group’s brokers, considers that the shares have a fair value of 570p.

For the current year to the end of this month he estimates £137.2m of revenues and £22.2m of adjusted pre-tax profits, worth 37.5p per share in earnings and comfortably covering a 10p dividend (9p).

The strength within the group inspires him to forecast £146.9m of revenues next year and £160.3m in 2023.

Respectively for 2022 and 2023 he goes for profits of £24.6m then £28.3m, with earnings of 41.5p then 45.5p, covering dividends of 12.5p then 14.8p per share.

My View

Well, that Trading Update pleased me when I read through the statement. It also made me look again at the group’s investment proposition.

After my profile the shares hit 416p, but that was just before Covid-19 impacted. They fell away to a low of 210p at one stage, the recover since then has been steady.

However, I am now looking for a healthy share price increase over the next few months.

Last night the group’s shares closed at around the 342.5p level.

That puts them out on a mere 9.2 times price earnings ratio on Shore Capital’s estimates.

It would also place them on just 8.3 times next year’s, and only 7.6 times 2023 forecasts.

I have no doubt that in time Roddy Davidson’s ‘fair value of 570p’ will be achieved.

However, in the meantime I look for the shares to hit 425p in the first half of next year, before edging even higher.

I now set my early Target Price at 425p.

(Profile 25.04.19 @ 370p set no Target Price at that time)