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FTSE 350: Mixed success from media's digitisation

ITV and Pearson are belatedly trying to digitise their businesses
April 28, 2022

The media world is still going through a transition. It used to be that videos, music and textbooks were purchased one at a time in physical form. Then Netflix (US:NFLX) pioneered video streaming, Spotify (US:SPOT) did it with music and Microsoft (US:MSFT) is now planning to do the same with gaming. Like most tech innovation, UK companies were slow to the party but now they have started to invest.

ITV (ITV) announced earlier this year that it plans to launch subscription service ITVX in the fourth quarter. Management thought it could be the centrepiece of its strategy to double digital revenue to £750mn by 2026. The plan will be expensive: total content investment for the whole business will be around £1.23bn in 2022 before rising to £1.35bn in 2023, and will remain at that level going forward.

Netflix’s recent first-quarter (Q1) results will have set some alarm bells ringing at ITV.  In Q1, the US streamer announced the loss of 200,000 subscribers to end a decade of growth. The company is forecasting that it will lose another 2mn in the second quarter of the year to leave it with 219.6mn.

Streaming is here to stay; the problem is that with the cost of living crisis biting in both the Europe and the US, consumers don’t have enough cash to subscribe to multiple services. In the first quarter of this year, 1.51mn streaming video on demand (SVoD) services were cancelled by UK households, according to Kantar. More than half a million of the cancellations were attributed to ‘money saving’.

If established players such as Netflix, which has produced multiple hit TV shows as well as Oscar-nominated movies, can’t keep hold of its subscribers, it is going to be difficult for ITV. 

This is probably why brokers aren’t hugely optimistic about ITV’s prospects. FactSet's consensus forecast is that earnings per share (EPS) will fall to 12.17p in 2024, down from 15.30p in 2021. This gives a very cheap-looking 2024 price/earnings (PE) ratio of 5.7. ITV's valuation is further collateral damage in the streaming wars.

Texbook publisher Pearson (PSON) is also trying to bring its product into the digital age. Pearson+, an educational subscription service, was launched in 2021, and is making some progress. Last year, the virtual learning division reported underlying sales growth of 11 per cent, while adjusted operating profit rose 28 per cent.

Virtual learning still only makes up 20 per cent of total sales and the forecast is only for mid to high single-digit growth until 2025. So it is a stretch to refer to it as a 'digital-first' business for the moment. However, the fact the board rejected a £7bn bid from Apollo – at 19 per cent above its current value – shows management thinks this strategy still has far to go.

Auction Technology Group (ATG), which listed last year, has taken auctions online. Unlike ITV and Pearson, it doesn’t need to go through a transformation, as it already has a digital focus. The platform connects auction houses with bidders on its platform. This model boomed while people were stuck at home during lockdowns in 2020 and 2021 Adjusted cash profit (Ebidta) rose 43 per cent to £31.8mn for the year to 30 September 2021.

The valuation slipped back from its lofty heights during the tech sell-off. Investors may also be sceptical about how much people will be willing to spend on arts and antiques at a time of tightening belts. Brokers disagree though, with FactSet consensus expecting 2022 EPS of 20p, up from 6.6p last year.

Out of these three, it is Auction Technology Group that is most likely to succeed. It is rarely the incumbents that disrupt an industry. Markets agree, given Auction Technology’s lofty forward PE of more than 40 times. 

 

NAMEPrice (p)Market cap (£mn)12-month (%)Fwd PEYield (%)Last IC View
4imprint Group2,91081726.0331.6Sell, 2,855p, 16 Mar 2022
Ascential3361,478-1.0250.2Buy, 333p, 3 Mar 2022
Auction Technology Group9181,1063.0460.0Buy, 1,374p, 2 Dec 2021
Auto Trader Group6376,00413.0261.3Hold, 697p, 11 Nov 2021
Baltic Classifieds Group154771na470.3Hold, 214p, 15 Dec 2021
Euromoney Institutional Investor9541,0431.0182.2Hold, 1,062p, 18 Nov 2021
Future2,4582,9697.0150.2Buy, 3,610p, 30 Nov 2021
Informa6008,8696.0271.8Hold, 560p, 15 Mar 2022
ITV773,111-34.066.7Hold, 83p, 3 Mar 2022
Pearson7895,9170.0202.7Hold, 674p, 25 Feb 2022
Relx2,39946,27625.0242.2Buy, 2,241p, 10 Feb 2022
Rightmove6275,2785.0261.3Buy, 651p, 25 Feb 2022
TrustPilot Group134553-57.0na0.0-
WPP1,02611,3508.0113.5Sell, 1,095p, 3 Mar 2022
Source: FactSet