Shrinking audience share disappoints ITV investors

UK-based television network ITV's first-quarter results disappointed investors on Wednesday, and its share price dropped by 5%, with one analyst describing it as more "Zzz than X Factor".

The share of viewers watching ITV Family content compared to its rivals fell by 8% in the year to 30 April and by 5% overall, with commercials following the same trend and falling by 7% and 5% respectively.

The group's total external revenues for the three months to 31 March rose 2% to £585 million, up from £571 million like-for-like.

Revenue growth of 3% from ITV's Broadcast and Online business bolstered the group's total revenue stream of 1%, which was stifled by losses in its ITV Studios arm of 4% due to the phasing of programme delivery.

"As we have seen previously, the timing of programme delivery can significantly impact Studios revenues on a quarterly basis as it has done in the first quarter with organic revenue down 10%. At constant currencies organic revenues in first quarter were down 8%," the company said.

An increase in net advertising revenue for broadcast and online channels drove growth in the area, along with a 14% increase in Online, Pay and Interactive revenues.

ITV is confident that its latest acquisition of US independent producer Leftfield Entertainment will see revenue growth over the year.

Net cash at 31 March fell from £164 million to £88 million due to pension scheme contributions and the repayment of the remaining £62 million of a bilateral loan in January.

Chief executive Adam Crozier highlighted the progression of ITV's growth strategy and the rebalancing of its UK and international businesses.

"Broadcast and Online started the year well, helped by another strong performance in Online, Pay and Interactive and by the ongoing improvement in the UK advertising market, with most sectors showing good growth.

"While ITV Family share of viewing has been lower than expected so far this year we have confidence in our strong schedule to come, including the Football World Cup in June. ITV Encore - our first pay channel - is on track to launch in June, followed later in the year by ITVBe, our first new Free To Air Channel in almost a decade," he added.

ITV expects Family net advertising revenue to rise by up to 13% by June, despite its 2% growth to £290 million in the first quarter, and is predicted to outperform the market at 7% in May.

The group is also on track to make savings on £10 million over the full year.

The network boosted its financial flexibility through a £525 million Revolving Credit Facility, which has a five year maturity and replaces the previous £250 million facility. ITV also entered a new £175 million financing facility, which extends to June 2021.

With a market capitalisation of £7.7 billion, ITV was the biggest loser on the FTSE 100 on Wednesday and was down by nearly 5% at 181.95p by 10:04am.

Despite Wednesday's drop, ITV's share price has been climbing higher over the past 12 months from 130.4p on 13 May 2013 to highs of 210.6p in February.

The FTSE 100 was down 0.05% at 6869.39 after jumping to a 14-year high on Tuesday.

Analyst view

With a 2014 price/earnings ratio of around 15 times and EV/EBITDA multiple of around 11 times and dividend yield of 2%, ITV's valuation "looks quite full versus media peers" says Investec analyst Steve Liechti.

"First-quarter interim management statement looks okay with the net advertising revenue comment more or less as we expected but some bulls may have wanted more and we note the SOCI [share of commercial impacts] share is poor while Studios is hit in the first quarter by programme phasing (offset in the full year) and FX.

"Our multiples-based target price of 195p is unchanged," he added noting that key risks include long-term TV trends and acquisition execution. Liechti has a 'hold' recommendation on the stock.