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BEAR POINTS:
• Advertising spending falling
• Television piracy threat to revenues
• Growth targets unrealistic
• BSkyB may have to sell its shares
BULL POINTS:
• Michael Grade's reputation
• Investment in growth
Advertising
It’s a damning sign when the analysts at a company's own stockbroker suggest selling their client's shares. That's what has happened at investment bank UBS, where its media analyst, Daniel Kerven, suggests selling shares in commercial television operator ITV after he downgraded his earnings forecast for 2008 to 4.2p per share against ITV's comparable figure of 5p for 2007.
Mr Kerven’s concerns look well-founded. At the beginning of this year, advertising moguls maintained they had not seen signs of a slowdown. But that has changed dramatically in the past three months. Recession looms and advertising spending is contracting. Media buyer ZenithOptimedia said two weeks ago that advertising spending growth will drop from 4.4 per cent to 3.8 per cent in Europe and North America between now and 2010. UBS believes television advertising - initially forecast to grow 1 per cent this year - will now contract 2 per cent, despite the effect of the Olympic Games and the Euro 2008 football tournament.
As a result, ITV’s own growth targets now look overly ambitious. And Michael Grade, the group's high-profile executive chairman, has his work cut out for ITV simply to tread water - in 2007 pre-tax profits and EPS were significantly lower, despite Mr Grade's claims of "operational and strategic progress". Viewing numbers increased, but net audience revenue was flat. Broadcasting, the largest of three division (the others are global content and online), was the worst performer, down 18 per cent at the cash profits level.
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ITV (ITV) |
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|---|---|---|---|---|
| ORD PRICE: | 63p | MARKET VALUE: | £2.45bn | |
| TOUCH: | 63-63.5p | 12-MONTH HIGH/LOW: | 122p | 63p |
| DIVIDEND YIELD: | 4.3% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 83p | NET DEBT: | 25% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2004 | 2.05 | 168 | 3.5 | 2.90 |
| 2005 | 2.20 | 311 | 5.4 | 3.12 |
| 2006 | 2.18 | 288 | 5.5 | 3.15 |
| 2007 | 2.08 | 188 | 3.5 | 3.15 |
| 2008* | 2.09 | 164 | 4.2 | 2.70 |
| % change | Nil | -13 | na | -14 |
Normal market size: 50,000 Matched bargain trading Beta: 0.7 *UBS forecasts |
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UBS forecasts that the proportion of advertising expenditure given to television versus other media will decline from 25.3 per cent in 2008 to 23.8 per cent in 2015. Indeed, television advertising expenditure will be negative for the next two years, as the recessionary grip tightens in the UK. Susceptible categories include retail and finance, which comprised 30 per cent of ITV’s 2007 television advertising revenue.
This is ITV's key vulnerability. Broadcasting revenues, most of which come from advertising, comprise over four fifths of the total, with global content about 12 per cent, and online a distant third at 1.6 per cent. Mr Grade wants to double content revenue - money earned from making programmes - to £1.2bn by 2012. And, he is hiring big guns to drive the turnaround strategy, he has boosted content development budgets by 50 per cent, and he is investing in online, which is the only media industry that is growing.
However, UBS's Mr Kerven says that ITV's aims are unrealistic. As it is, ITV Productions already makes 3,000 hours of original programming each year. He is also sceptical about online revenue growth, which needs to increase nearly five-fold to hit Mr Grade’s £150m target by 2012.
Added to this is the growing threat of piracy, which is rife in television. Popular shows are illegally downloaded online before content owners make them available in all markets. In response, major Hollywood studios, according to the Financial Times, are rushing to put hit shows online. For ITV the threat is two-fold. First, viewers will increasingly migrate online to get the latest content, putting enormous pressure on ITV to produce compelling viewing at a reasonable cost. Second, there is the more direct threat that ITV will lose its audience to download sites.
Finally, ITV's share price will be under pressure if, as looks likely, the government forces satellite TV operator British Sky Broadcasting to cut its 17.5 per cent stake down to 7.5 per cent. BSkyB might even decide to dump the whole stake.
Michael Grade is not to be taken lightly, but the timing of both long-term trends in television viewing and short-term recessionary effects are against him. The shares, which are rated at 15 times UBS's forecast EPS of 4.2p for 2008, are likely to come under further pressure as the full force of falling advertising spending becomes clear. Sell.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
