ITV shares plunge 60%, but market defiant on ‘buy’ status

Broadcaster hit by Covid-19 and stiff competition, but investors think the worst is over and back its strong back catalogue.

Enforced lockdown from the pandemic was a golden opportunity for broadcasters, given a largely captive audience, but this has not really filtered through to ITV (LSE:ITV).

A 60% fall in its share price in the year to date means that bid speculation is bound to resurface, if indeed it ever went away. 

In any event, at current levels ITV is destined for relegation from the FTSE 100 at the reshuffle next month. 

Quite apart from substantial competition from rivals with money to burn such as Netflix, Disney+ and Amazon Prime, ITV’s reliance on traditional advertising revenue is something of a thorn in its side. 

Companies understandably pulled back from advertising goods that they could not sell. In any event, given the fact that costs became a priority, the advertising budget is often the first to give way. 

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Even with advertisers now slowly returning, much of the damage has already been done, with a 21% decline in revenues for the half-year including a 43% fall in the second quarter alone.

At the same time, ITV’s Studios business, with its increasingly influential media presence and importance as a contributor to group profits, was effectively mothballed for a large percentage of the reporting period. 

Revenues dropped by 17%, which will put significant pressure on the unit for the rest of the year, although it is promising that 70% of productions have restarted.

ITV may have been running to keep still during this period, but has been working hard to keep in financial shape. 

It has already achieved £51 million of the proposed £60 million targeted cost savings for the year. Additionally, deferring tax payments and pension contributions have provided additional breathing space. 

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Net debt has reduced 34% year-on-year, while access to liquidity of £1.2 billion is a further prop. Indeed, the financial position has enabled the company to resume annual capital expenditure, which is estimated to run between £85 million and £95 million.

Viewership results have been something of a mixed bag. The absence of some of its blockbuster shows has seen ITV Hub+ subscriptions drop to 390,000 from a previous 407,000 and although there has been “good growth” in its joint venture BritBox, for the moment it remains a net cost.

Even so, the Subscription View on Demand service has seen the benefits of a strong back catalogue, which could bode well for its future development. The lack of major sporting events for the period was an inevitable drag on numbers, while the growth of 13% in online viewing and 15% in monthly active users could perhaps be attributed to changing habits, as opposed to increasing market share.

At this point, the company is not able to provide much future guidance. The lack of a previously punchy dividend is a disappointment to income-seeking investors, even though this was largely not expected.

Over the last year, much of the impact as confirmed by these figures has been priced in, with a 42% decline in the share price comparing to a drop of 15% for the wider FTSE 100. Despite the company’s current travails, the potential for further growth within the Studios unit and increasingly focused moves to reshape the business in light of changing viewing habits are well recognised by investors. 

As such, the general view of the shares remains defiantly optimistic, with the market consensus still coming in at a ‘buy’.