BULL POINTS:
■ TV advertising set to perk up
■ The Archie Norman effect
■ Easier regulatory regime
■ Cost savings
BEAR POINTS:
■ Large debt pile
■ Pension fund deficit
ITV has had a torrid time for the past 18 months. But the troubled broadcaster looks set to see a reversal of its fortunes, thanks to a series of likely uplifts this year. First, with more than half of its revenues stemming from advertising, any cyclical recovery in advertising spending must bring benefits. Moreover, research from media specialist Screen Digest has found that, while overall advertising spending may remain depressed this year, spending on television advertising is set to outperform. True, this is partly because advertising rates have dropped to exceptionally low levels, but boosts are expected from the general election in the UK and the football World Cup.
The 2006 World Cup only added about 2 per cent to ITV's revenues, so the boost this time will not be huge. Analysts at investment bank Goldman Sachs expect that ITV will only generate about £18m of extra advertising revenue during the tournament itself, which will kick off in June and run until July. However, analysts believe that the extra spending may kick-start momentum, which could last for the remainder of the year.
ITV should also benefit from the guidance of its newly installed chairman, Archie Norman. The former Tory MP gained a glowing reputation in the late 1990s as the architect behind the turnaround of supermarkets operator Asda, where he was chief executive. He has already begun to sort out the broadcaster since starting his job on 1 January. Having already slashed the board, he has reportedly launched a strategy review to accelerate the broadcaster's revival and ensure that - according to a leaked memo - ITV is "a very different business" in three years' time. Mr Norman is also leading the search for a chief executive for ITV, and this time he hopes to keep the process behind closed doors until the new boss is found.
Furthermore, Mr Norman's political connections should come in handy, especially since ITV is at the centre of a number of regulatory debates this year. First up will be the issue of Contracts Rights Renewal, the formula that regulates - and therefore restricts - ITV's advertising rates. The formula was introduced following the 2003 merger between Carlton and Granada that created ITV, which at the time dominated UK TV advertising. But ITV's dominance has been eroded so, although the Competition Commission is against scrapping the mechanism, it is considering alternatives. For example, the formula might only be used during peak-time programmes, rather than all day.
Another important issue is that of network operators generating revenue from product placement in TV programmes. The consultation period for this issue has just ended, and an announcement is due soon. Yet analysts at Liberum Capital estimate that loosening restrictions on advertising rates and product placement could yield ITV £113m of extra profit this year.
What's more, analysts at investment bank Morgan Stanley say the Conservative Party is committed to adopting a more relaxed regulatory approach towards ITV. So, if the Tories gain power later this year, that could spell more good news for the company.
| ORD PRICE: | 56p | MARKET VALUE: | £2.18bn | |
| TOUCH: | 55-56p | 12-MONTH HIGH: | 60p | LOW: 16.5p |
| DIVIDEND YIELD: | nil | PE RATIO: | 37 | |
| NET ASSET VALUE: | 4.6p | NET DEBT: | 392% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2005 | 2.20 | 0.31 | 5.4 | 3.12 |
| 2006 | 2.18 | 0.29 | 5.5 | 3.15 |
| 2007 | 2.08 | 0.19 | 3.5 | 3.15 |
| 2008 | 2.03 | -2.73 | -65.9 | 0.68 |
| 2009* | 1.88 | 0.91 | 1.5 | nil |
| % change | -7 | — | — | -100 |
Normal market size: 100,000 Matched bargain trading Beta: 1.2 *Liberum Capital forecasts (profits and earnings not comparable with earlier years) | ||||
That said, ITV will need more than a surge in advertising revenues and benefits from a relaxed regulatory environment to get itself fully into shape. The group still has a massive debt pile - some £728m - to service. But holding its net debt at that figure during the first half of 2009 was a big achievement, given about £150m of exceptional cash costs. Since then, the maturity profile of its debt has been improved by refinancings.
There is also the issue of a rising deficit in the group's pension fund to consider. By June 2009, the actuarial deficit had swelled to £538m from £178m in December 2008. This has also curbed debt repayments - £31m was paid as pension deficit funding in the first half of 2009 alone.
But stringent cost-cutting measures put in place last year should help. ITV is on course to have delivered £155m in savings for 2009, and savings should rise to £215m in 2010 and £285m by 2011, according to City analysts. Debts will also be paid off following the impending sale of social networking website Friends Reunited and, potentially, the Freeview business SDN.
