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ITV braced for advertising slowdown

By April, ad sales are expected to have fallen by between 10 and 15 per cent
March 2, 2023
  • Investment in ITVX hits profits 
  • Strong performance from studios division 

Last week, marketing giant WPP (WPP) shrugged off fears that its industry was set for a downturn, predicting that global advertising spending would keep growing in 2023. Television group ITV (ITV) is feeling rather less jolly, however, forecasting an 11 per cent fall in ad sales for the first quarter of this year.

 

Let’s start with the good news. ITV’s studios arm – which produces TV shows for streaming platforms and broadcasters, including the BBC – grew revenues by 19 per cent to £2.1bn in 2022. The division also managed to nudge up its margin to 12.4 per cent, in spite of inflation and rising health and safety costs. As a result, the division’s adjusted Ebitda jumped by 22 per cent to £259mn, putting it almost in line with pre-pandemic levels.  

In a painful display of symmetry, however, ITV’s media and entertainment (M&E) business – which is significantly higher-margin – saw adjusted Ebitda decrease by 22 per cent in the same period. A 1 per cent fall in advertising sales coincided with heavy investment in the group’s new streaming service, ITVX, and profits suffered as a result. Across the group, Ebitda fell by 12 per cent and cash conversion also took a hit, falling from 80 to 75 per cent.

The big question is whether all the investment – including the £1.3bn planned for new programmes in 2023 – is actually worth it. The signs so far are positive, if not dazzling. Monthly active users have increased by 6 per cent to 10.5mn, while total streaming hours are up by 9 per cent at £1.2bn. The ad-free subscription service has also proved relatively popular, with subscription revenues up 29 per cent to £54mn. 

The next few months are likely to be difficult, however. ITV said the economic backdrop is “challenging” and total advertising revenue is expected to fall by 11 per cent in the first quarter of 2023, despite strong growth in digital adverts. Early indications are that ad sales will be down by between 10 and 15 per cent in April, according to management. 

However, we remain convinced of the strength of ITV’s studio arm. As a result, we still believe that the group is cheaper than the sum of its parts, an argument we set out in an investment idea we published on 24 November 2022. It is also important to remember that – despite the fall in profits – 2022 marked the second-best year for ad sales in ITV’s history, and digital revenue is still growing strongly. If investors are willing to endure some short-term turbulence, they could ultimately be rewarded. Buy. 

Last IC View: Buy, 74p, 24 Nov 2022 

ITV (ITV)     
ORD PRICE:85.8pMARKET VALUE:£3.5bn
TOUCH:85.7-85.9p12-MONTH HIGH:112pLOW: 54
DIVIDEND YIELD:5.8%PE RATIO:8
NET ASSET VALUE:45p*NET DEBT:33%
Year to 31 DecTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20183.2156711.78.00
20193.3153011.88.00
20202.783257.10nil
20213.454809.403.30
20223.7350110.75.00
% change+8+4+14+52
Ex-div:13 Apr   
Payment:25 May   
*Includes intangible assets of £1,6bn, or 40p per share