When ITV, the broadcaster and programme-maker, announced half-year results in July, it may have expected a more positive response from the stock market than it received. Every measure of profit, from pre-tax to earnings per share, was comfortably ahead of the same period last year and the outlook was optimistic for the rest of 2024. Yet the shares toppled from a year’s high of 84p to 77p and have been subdued since. In December 2019 they were 152p.
At the least, this suggests a hefty dollop of caution among investors, especially considering the prospect of close to 10p a share adjusted earnings for this year and maybe a 6p dividend. Those numbers would signal a 7.7 p/e ratio and a 7.8 per cent yield. Such returns are rarely scorned without reason.
The first is total revenue which, unlike the half-year profits, fell from £1.96 billion to £1.9 billion. Unusually, this has been explained away as little more than a technicality, a few projects being contracted as executive productions rather than co-productions, meaning that they clocked up less revenue.
“It’s really just about the ebb and flow of dealmaking, and every deal is different,” Julian Bellamy, managing director of ITV Studios, said. “We are winning the same business, we are making the same shows, we are making the same profit. It’s just the accounting treatment.”
Fine, but that sows doubts about the validity of gross income, the foundation of the numbers analysts and would-be shareholders rely on. It would be one thing if the changes had merely shaved a bit off a healthy increase, but a different matter when it turns a positive into a negative.
Studios is regarded as the group’s rock-solid anchor, making programmes for publishers around the world. It is the largest UK content producer and one of the largest unscripted US producers, backed by a 90,000-hour library. It is in the top three in most of the foreign markets in which it operates and sells to Netflix and other streaming rivals. So it can do without the bean-counters tinkering with the numbers.
The bigger problem, as the company acknowledges, is that its fortunes are seen as tied to the wider UK economy, and therefore to the advertising that flows into its domestic broadcasting and streaming businesses.
Entertainment shows such as Love Island, The 1% Club and Dancing on Ice have developed millions of loyal followers, which advertisers relish. More expensive, but still profitable, are big sporting events, including football’s Euros and Uefa Nations League. But the UK’s flat GDP is unhelpful and many would-be advertisers are putting off decisions until after the budget on October 30.
Broadcast programmes are increasingly being used as gateways to the bigger prize: streaming, because people are increasingly creating their own nightly schedules. A major success can have a halo effect: although the celebrated Mr Bates vs the Post Office did not itself make any meaningful money for ITV, 93 per cent of its ITVX audience clicked on other programmes. But viewers are fickle, especially when it is so easy to switch to BBC iPlayer, Netflix, Amazon, Disney+ and the Channel 4 and 5 offerings.
In the past six years ITV’s content revenue has grown by a compound 5 per cent a year, against a 4 per cent industry average. ITV appears wedded to its business model but a worry for everyone is how to tempt the under-40s, and the advertising dollars they generate, away from YouTube, Tik Tok and Instagram.
Citi Research, which bemoans the reaction to the latest half-year results as harsh, predict that ITV’s pre-tax profits will rise from last year’s £396 million to £506 million for 2025. But beware firms where the intangible assets, in this case mainly contracts, rights and franchises, amount to half the market cap.
At the company’s annual meeting in May, a shareholder said the management had lost the stock market’s confidence and should seek a takeover. As he pointed out, Amazon could buy ITV out of petty cash. The chair, Andrew Cosslett, told him to console himself with the fat dividend yield.
Advice Hold
Why The share price reflects the looming threats, but a predator would change the picture
DE LA RUE
If ever a chief executive needs to turn up well-armed with convincing answers, it will be Clive Vacher of the banknote printer De La Rue when he faces shareholders at this month’s annual meeting in Basingstoke.
The company has spent much of this year trying to talk itself out of its 203-year existence, having made the breathtaking admission in the annual report that it is beset by “material uncertainty which may cast significant doubt upon the group’s ability to continue as a going concern”.
That is an astonishing statement for a long-established business with £310 million annual revenue, even if that slid into a £15.4 million pre-tax loss. So it has been negotiating with a flock of suitors to sell both its divisions, banknotes and authentication, which makes security systems to thwart counterfeiters.
The problem is the need to repay a revolving credit facility with the banks, due next July and standing at £118 million at last March’s year-end. Vacher admits it is unlikely the company will have the cash to meet that, and the lenders seem disinclined to extend the credit or roll it over. Hence the sales.
What, then, are investors buying into? If it sells its two divisions, in theory it will be left with just a bundle of cash, maybe £100 million after repaying debts if the stock market’s £183 million valuation is at all accurate. More likely, once one division has been sold the other plus cash will be swallowed by a straightforward takeover. The annual report hinted that the authentication business will probably go first.
Over half De La Rue’s shares are held by institutions, led by the activist investor Crystal Amber with over 15 per cent. Earlier, Crystal’s investment adviser, Richard Bernstein, said: “We think it is a sitting duck for corporate action.”
Investec predicts 7p earnings per share for the current year. That would put a 100p-a-share takeover bid on a 14 p/e ratio, but there is potential to cut that substantially as the currency operations recover. It is telling that the brokers’ target price is only 110p, giving little headroom for profit.
ADVICE Hold
WHY Upside greater than downside