Join our community of smart investors

STV shows growth on all channels

STV offers robust growth prospects and the potential introduction of retransmission fees could put a rocket under its cheaply rated shares.
July 30, 2015

A resurgent advertising market and investments in digital and local content are fuelling strong growth at Scottish broadcaster STV (STVG), yet its shares trade at just 11 times earnings forecasts for the current year. That looks too cheap to us, and that's before factoring in the speculative upside from the possible introduction of retransmission fees, which could send STV's earnings soaring by 70 per cent and put a rocket under the shares.

IC TIP: Buy at 453p
Tip style
Value
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Strong sales and profit growth
  • Digital and local investments
  • Shares are cheaply rated
  • Significant potential upside from retransmission fees
Bear points
  • Large pension liabilities
  • Tough comparative with World Cup in 2014

STV, which holds the broadcasting licence for ITV1 in Scotland, attracts around 3.6m viewers a month to its flagship STV channel with a wide range of dramas, reality TV shows and local news. It continues to gain market share and has diversified its business by launching local channels in Glasgow and Edinburgh, as well as rolling out catch-up and live-streaming services, and investing in higher-margin production.

 

 

Last year, strong demand for televised and digital content drove sales and operating profits up 9 per cent in the group's main consumer division, which accounts for 98 per cent of profits. The segment benefited from buoyant advertising spend during last year's World Cup, and looks poised to profit from an improving advertising backdrop this year. STV has got off to a strong start reporting a 9 per cent increase in national advertising revenue in the first quarter. Part of this is due to the timing of Easter and advertisers spending more earlier in the year to avoid the General election.

While these timing issues coupled with the absence of World Cup spending means the second quarter is not expected to be pretty, overall it should be a decent year. Indeed, with the Rugby World Cup helping to partially offset the tough World Cup comparatives, broker Numis expects ad sales to be up 2.5 per cent overall this year.

STV's newer ventures offer equally rich prospects. Its new city-focused channels, which reached more than 1m viewers in January, attracted more than 100 new advertisers last year and boosted existing clients' spending. The group has also secured licences to offer similar services in Aberdeen, Ayr and Dundee. Meanwhile, strong demand for the STV Player app and live-stream services drove digital sales up by 40 per cent in the first five months of 2015, after rising 23 per cent in 2014. STV's small production business fell short of expectations for 2014, with operating profits flat at £400,000, but it continues to win commissions for shows such as The Link on BBC and Catchphrase on ITV.

There could also be significant upside from the potential introduction of retransmission fees, which would allow STV to charge pay-TV providers, such as Sky and BT, to broadcast ITV1. According to broker Liberum, this could generate revenues of between £9.4m and £17m a year that would flow straight to profits. This could boost earnings by 70 per cent in the longer term and cause the shares to re-rate. Authorities are currently discussing the issue and analysts expect a decision by next May.

Even without that boost, STV's management is targeting compounded annual EPS growth of 10 per cent from 2014 to 2017. Yet despite the group's rich growth prospects, the shares command a desultory rating. Net debt has fallen by 35 per cent over the past two years and does not look a concern. And while the company has a large pension scheme, the deficit of £15m looks manageable.

STV (STVG)
ORD PRICE:453pMARKET VALUE:£178m
TOUCH:445-460p12-MONTH HIGH:460pLOW: 322p
FORWARD DIVIDEND YIELD:2.7%FORWARD PE RATIO:10
NET ASSET VALUE:9p*NET DEBT:£29m

Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
2012102.614.431.3nil
2013112.115.233.02.0
2014120.417.337.68.0
2015**128.719.041.410.0
2016**135.121.044.612.0
% change+5+11+8+20

Normal market size: 750

Matched bargain trading

Beta:0.5

*Includes intangible assets of £9.5m, or 24p a share

**Numis forecasts, adjusted PTP and EPS figures