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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The ITV drama Mr Bates vs The Post Office achieved the remarkable feat of jolting the UK government into action over the decades-long Horizon accounting software scandal in Britain. The broadcaster needs a similar effect on its share price and profitability.
Shares in the nearly seven-decades-old company have fallen 60 per cent in the past four years as it struggles to shake off a reputation as an ex-growth stock still tied to traditional “linear” television. The worst downturn in TV advertising since the financial crisis last year did not help.
ITV has long sought to shift away from fickle TV ad revenues. Chief executive Carolyn McCall is midway through yet another effort. This involves cost-cutting as well as £160mn of investment in streaming service ITVX and further expansion of its production arm, which makes shows for its own channels and streamers such as Netflix.
On the face of it, ITV’s recent full-year results made for grim reading. Adjusted earnings fell nearly a third year on year to £489mn. The measure’s decline since 2017 stands at more than 40 per cent.
But a 4 per cent revenue rise at ITV Studios last year, which accounts for half of total revenues, kept the decrease at a group level to 2 per cent. Earnings at the production arm improved 10 per cent to £286mn — promising but insufficient to make up for the 56 per cent slump in media and entertainment.
Broadcasters will probably keep a lid on spending until there is greater certainty over the ad market. But revenues at ITV Studios are expected to grow by an average of 5 per cent a year between 2021 and 2026 — hardly startling but better than the wider market — while maintaining margins of 13-15 per cent.
Recent deals suggest that the market does not fully appreciate the studios business. A £1.15bn deal for rival production company All3Media by investment group RedBird IMI last month implied a trailing enterprise value/ebitda multiple of just under 12 times. Applying even a less generous multiple to ITV Studios in a sum-of-the-parts calculation suggests the market is undervaluing the studios business.
Nevertheless, shares on the day of ITV’s results rose on expectations of an improvement in TV ad revenues. Crucially it also started a £235mn buyback — equivalent to nearly 10 per cent of its market capitalisation — funded by the recent sale of its share in the Britbox streaming service.
ITV is changing, slowly. But it has yet to jolt the market into seeing it as anything but an ex-growth, linear broadcaster.
