ITV set to shift into Top Gear

Last year, ITV's television advertising sales rose 6 per cent, sending adjusted cash profits at the core broadcasting and online division up 17 per cent to £568m. But ITV is also reducing its reliance on these cyclical advertising revenues by growing production and digital sales. Non-advertising revenues were up by 10 per cent in 2014 to £1.33bn, or 45 per cent of group turnover. Investment in ITV Player and soaring demand for online video helped fuel a 30 per cent rise in ITV's online, pay and interactive revenues, to £153m.

Despite a dip in audience share in 2014, demand for ITV's content remains strong. The broadcaster's top-class content continues to attract blue-chip partners. It inked a comprehensive four-year deal with Sky at the start of 2014 and extended its partnership with Virgin Media. It also strengthened its offering by launching two new channels last year: ITVBe, which caters to young female viewers, and ITV Encore, its first pay-only channel.

ITV is currently focused on expanding internationally and growing its higher-margin production business. Accordingly, it has acquired almost a dozen businesses in the past three years, including four US producers, and landed a landmark deal with pay-TV platform Multichoice to distribute its programming across Africa. The acquisition trend has continued this year with the purchase of The Voice producer Talpa Media. And ITV's net cash pile, robust cash generation and management's willingness to incur net debt of up to 1.5 times cash profits provides plenty of scope for further deals.

That should support growth at ITV Studios. Last year's purchase of US producer Leftfield Entertainment was key to strong 2014 production division sales, driving adjusted cash profits up 22 per cent to £162m. The division now generates nearly half of its revenues outside the UK, and ranks among the top independent production studios in the US. Management is confident it will deliver double-digit constant-currency sales growth this year.

ITV invests over £1bn in content annually, but it remains frugal. In just two years, it has unearthed £43m in cost savings and widened its adjusted cash profit margin by more than a fifth to 28 per cent. That helped it deliver a fifth consecutive year of double-digit profit growth in 2014. And it shows no sign of slowing down. Ignoring the Talpa acquisition, broker Liberum expects sales to climb 10 per cent this year, sending cash profits up 16 per cent and EPS up a fifth to £907m and 16.5p, respectively.

Income prospects are equally strong. Management hiked the dividend by more than a third in 2014 and has committed to raising it by a fifth this year and next. It also doled out a special dividend for the third year in a row. A repeat of the 6.25p special dividend this year would double Liberum's forecast yield to a lofty 5 per cent. Yet despite the zippy growth and decent yield, ITV's shares trade at 15 times forecast earnings - a discount to European broadcasting peers - falling to 13 times in 2016.

Liberty Global, which holds a 6.4 per cent stake in ITV, is interested in licensing and distributing ITV's content across Europe, which could prove to be a near-term share price catalyst, as could a rumoured move to ITV by former Top Gear presenter Jeremy Clarkson. A new motoring-themed show could attract young petrolheads - an audience with strong advertising appeal - and be rolled out internationally. And if ITV wins its perennial battle to charge retransmission fees to distributors, it could earn £100m in annual, predictable, cost-free revenues.

Speculation aside, ITV looks set for success. First-quarter TV ad sales rose an estimated 11 per cent this year, and are expected to grow between 4 per cent and 7 per cent in April. Together with a strong programming schedule and the broadcaster's exclusive rights to this year's Rugby World Cup, that should assuage fears of election-related disruption and a hangover from the Fifa World Cup.