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Unloved STV worth a chance

SHARE TIP: STV (STVG)
March 31, 2011

BULL POINTS:

■ Progress of programme making

■ Share of regional advertising growing

■ Disposal of Pearl & Dean

■ Falling debt burden

BEAR POINTS:

■ Pensions liability

■ Dispute with ITV

IC TIP: Buy at 156p

Shares in Scottish television broadcaster STV are trading at just four times City analysts' estimates for 2011's earnings even though the group reported a robust set of results for 2010. Perhaps this is because investors can't see past the weight of the group's debt, the deficit in its pensions fund and, most importantly, its litigation battle with ITV. But there is a recovery story beneath these issues.

IC TIP RATING
Tip styleSpeculative
Risk ratingHigh
TimescaleLong term
What do these mean? Find out in our

STV's bosses have embarked on a plan to reduce the company's dependence on ITV's programming schedule and expand its own offerings. The first step was to opt out of some of ITV's programmes and deliver more home-made content. ITV still supplies about 90 per cent of STV's programmes, but STV felt able to show a new series of Taggart in preference to Downton Abbey, and claims that, as a result, it did not lose a single viewer. The plan saved STV £5.5m a year in programming costs and helped lift broadcast profit margins from 10 per cent to 15 per cent. Meanwhile, STV's growing share of Scotland's television viewing meant that its share of regional advertising grew from 23 per cent in 2009 to 25 per cent in 2010.

But STV's plan has also prompted a dispute with ITV. Both companies are suing each other for tens of millions of pounds as a result of STV's opt-outs from networked programmes. Even so, most City analysts who follow STV think the case - scheduled for May - will be settled out of court. Broker Peel Hunt, which advises STV, even thinks that resolution of the dispute, which has already cost STV £3.5m in legal fees, could provide a trigger for the shares to be re-rated.

ORD PRICE:156pMARKET VALUE:£59.8m
TOUCH:150-156p12-MONTH HIGH:155pLOW: 55p
DIVIDEND YIELD:nilPE RATIO:4
NET ASSET VALUE:NegativeNET DEBT:£52.2m

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2007120-22.7-120.0nil
20081114.93.6nil
2009906.112.3nil
20101053.913.9nil
2011*11514.137.1nil
% change+10

Normal market size: 2,000

Matched bargain trading

Beta: 1.1

*Canaccord Genuity forecasts (profits and earnings not comparable with historic figures)

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Besides, STV's content business is gaining traction, with the group recently signing a deal to share content with US production company Kinetic Content. Last year, the value of its external commissions grew by just £1.4m to £7m, but management expects this figure to hit £16.8m this year.

Moreover, troubled screen advertising outfit Pearl & Dean will no longer be a drag on STV's financial health because it has been sold. Pearl & Dean's cash losses had been pushing up STV's debt, and masking its ability to generate cash. Following its disposal, cash generation in the rest of the business should become much clearer, and management says net debt will fall quickly. Analysts at broker Canaccord Genuity expect net debt to fall to £43m by the end of this year and to £30m by the end of 2012.

The deficit on STV's pension fund is also less of an issue, due to improving equity markets and rising long-term interest rates. The liability, which was £26m, has been marked down to £16m.