ITV plc looks ridiculously cheap

Ongoing political and economic uncertainty has meant a rollercoaster year for holders of stock in free-to-air broadcaster ITV (LSE: ITV). With the share price recently returning to lows not seen since last November and Brexit likely to continue dominating headlines, should they jettison the FTSE 100 constituent from their portfolios?  

I’m not so sure. Right now, I’m inclined to view the company as something of a bargain.

Robust performance

Today’s interim results weren’t all that bad. Total external revenue fell 3% to £1.46bn in the six months to the end of June with a decline in net advertising revenue offset by 6% growth in non-advertising revenues.

According to the company, this was a “clear indication” that efforts to rebalance the business – instigated by outgoing CEO Adam Crozier – were succeeding and that ITV was performing in line with expectations.

Broken down, revenue from ITV Studios rose 7% to just under £700m over the period (including currency benefits), although adjusted EBITA fell 9% (to £110m) as a result of continued investment in its US scripted business and the fact that figures in the prior year included a lucrative 4-year licence deal for The Voice of China.   

Performance at the £7bn cap’s Broadcast business was deemed “robust“, despite the decline in advertising revenue. Perhaps unsurprisingly, online viewing continues to grow in popularity – rising 34% over the period. Given this, it’s to be expected that the company plans to continue investing in its digital capabilities.

In addition to the above, ITV’s outlook for the rest of 2017 was more encouraging and could explain why its shares are up 3% in early trading.

Having already secured a large proportion of its expected full year revenues, ITV’s guidance for 2017 as a whole “remains unchanged” with adjusted EBITA likely to be “broadly in line” with that achieved in 2016. 

Perhaps most importantly, the Broadchurch broadcaster expects advertising revenue to fall by only 4% in Q3 compared to 8% over H1. Further organic revenue growth is also predicted, particularly from its online and pay divisions (which registered double-digit growth over the reporting period).  

Going cheap

In contrast to a lot of shares trading at supposedly bargain prices (step forward, Carillion), I think ITV might be the real deal.

While it will never shoot out the lights in terms of growth, a valuation of just 11 times forecast earnings for the current year seems too low for a company with great free cashflow, high operating margins, and a long history of generating consistently decent returns on the money it invests. With saving rates looking unlikely to improve anytime soon, the well-covered 4.7% yield should also be highly attractive for investors looking to generate income from their portfolio. 

There’s also little doubt that the recent appointment of highly-regarded Dame Carolyn McCall at CEO was a great move, even if it does put to bed (for now) persistent rumours about the company being a takeover target. So long as the current easyJet chief can continue to diversify ITV’s interests (in addition to addressing the company’s growing debt pile and pension deficit), I remain unconvinced by the argument that ITV is simply a declining legacy business.

With stock markets still close to record highs and the valuations of many companies looking frothy, I consider ITV an intriguing value proposition.