ITV’s grim outlook

chris

With a share price well below bargain basement prices, and little or no immediate benefit in sight, the UK’s leading commercial network was bound to attract a few vultures keen to look over its assets. But a report from investment bankers Morgan Stanley suggests that any new owner is going to have to wait some time for a return on its investment.

Monday saw ITV’s share price “rocket” up 8.8% (3.4p) in value – its largest move since 2004 - on news that the co-founder of Dutch production house Endemol (best known as the owner of the Big Brother format) had not ruled out an interest in acquiring the broadcaster. Any positive progress is to be welcomed, given that ITV has fallen by 55% over the past year.

John de Mol told the Financial Times that some sort of deal which included ITV “could make sense”. Meanwhile the London press has stated that any number of other layers – all previously mentioned by us – could be players in winning control of ITV, not least Haim Saban, Italy’s Mediaset, RTL Group, and “several” US-based operators.

This is all well and good, but back to the bank’s report which predicts that ITV’s earnings per share (EPS) will tumble this year by 20%, by 17% next year and 27% in 2010. Indeed, Morgan Stanley’s share price target is just 41p, down almost 20% on their last target. The report says that ITV remains “expensive” even at these levels when compared to European commercial broadcasters. However, the bank says: “We think recent underperformance has gone far enough and we move from Underweight to Equal-weight.”

The bank reminds investors that the UK Court of Appeal’s ruling is imminent on the overall question of the forced divestment by BSkyB of at least 10.4% of its near-18% stake in ITV. “The acquisition of such a stake by a trade or private equity buyer could promote substantial outperformance in the shares. Midcap bid activity has affected a third of the European media sector’s constituents in the last 12 months,” says the bank.

The bank says that their forecasts are predicated on a downturn widely expected but not yet seen in ITV1 advertising. “The H2 comparatives are tougher (H1 2007 ITV1 advertising -9%, H2 flat) while the sharp slowdown in the economy looks liable to impact the key categories like retail (21% of ITV1 advertising) and food. In Global Content, weakening advertising trends for other broadcasters are likely to impact demand for third party sourced product from the likes of ITV. In online, ITV’s early stage operations are still in spend mode while we have now anticipated a shallower curve of revenue growth trajectory.”

“ITV’s potential responses to this are limited. TV is, by nature, an operationally geared business,” says the report. “We have assumed (i) that network schedule spend is held flat out to 2012 (ii) that ITV reduces its regional programming spend by £30m in 2009 and (iii) that it pushes through £15m of incremental cost saving in 2009 rising to £30m in 2010.”

“Throughout Europe, broadcasters are facing (i) a falling percentage of advertising budgets being devoted to television as big advertisers shift money towards the internet (ii) fragmentation of audiences due to the increase in competition as a result of the increased number of pay and free-to-air DTT channels that are available (iii) further impingement on viewing volumes from the advance of new viewing forms such as the BBC iPlayer, which accounted for 5% of all UK Internet traffic in February (iv) increasing costs as free to air broadcasters roll out their own DTT channels and online offerings.”


Source:RapidTVNews

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