STV expands beyond broadcasting

Readers based in England are probably not familiar with STV (STVG). It is Scotland's most popular peak-time television channel, and is what pops up if you press ‘3’ on your Scottish TV remote. Its roots stretch back to the 1950s, when Channel 3 was introduced as a commercial alternative to the BBC. Channel 3 was designed to cater for different regions of the UK, but over time ITV (ITV) hoovered up the majority of broadcasting licences. The remaining two were consolidated by STV.

Much like other broadcasters, STV is feeling the advertising squeeze. Total advertising revenue dipped by 2 per cent in 2022 to £110mn and things have since got tougher. In the first quarter of 2023 ad sales fell by 15 per cent – despite strong growth in the group’s streaming service – and by April ad sales are expected to be down by 10-15 per cent. 

Management has been making headway to modernise the business, however. STV’s digital division, combined with its studios business – which makes shows for the likes of the BBC, Channel 4 and Apple – now generate 38 per cent of profits, and are on track to reach a 50 per cent contribution in 2023. According to analysts at Panmure Gordon, this is "raising the quality of the earnings and the potential growth rate”. More than £50mn revenue has been secured for 2023, significantly ahead of its target of £40mn.

It’s early days, however: studios generated just £1.4mn of adjusted operating profit in 2022. Meanwhile, inflation is still a problem and the advertising backdrop remains gloomy – particularly if ITV’s latest results are anything to go by. STV is cheap, trading on a forward price-to-earnings ratio of just 8.6, compared with ITV’s 9.7. However, ITV’s studios division is far more established, and we don’t like the fact that STV's liabilities outweigh its assets at all. A tentative hold. 

Last IC View: Hold, 339p, 9 Sep 2021