ITV PLC (ITV) is a British integrated producer broadcaster (IPB), headquartered in London, United Kingdom. The group creates, owns and distributes high-quality content on multiple platforms globally, and owns 13 of the regional licenses and sells advertising on behalf of all 15 licences, making it the largest family of commercial channels in the UK. The company was founded in 1955 when it began broadcasting on Channel 3 in the London area. With 40 million viewers reached weekly through the company's programmes, the group through its channels reaches over 65% of the UK population each week. The group is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.

Key Statistics

Management
Sir Peter Bazalgette is the Chairman of the Board since May 2016. He is also a member of Nomination and Remuneration committee. Dame Carolyn McCall is the Chief Executive Officer of the group; she was appointed to the position in January 2018. Julian Bellamy is the Managing Director of ITV Studios and had held various positions as directors and head before joining the group.

Segments
The company's operations are differentiated in two segments: Broadcast & Online and ITV Studios. The Broadcast & Online segment operates the largest family of commercial channels in the United Kingdom and engages in broadcasting various contents on its family of free-to-air channels through linear television broadcasting. The company also delivers its content on multiple platforms, including on-demand via the ITV Hub and an over-the-top service on 29 platforms. The ITV Studios segment operates in the UK and internationally across 12 countries and is the group's international content business, engaged in creation and production of programmes and formats that return and travel, including drama, entertainment, and factual entertainment for its channels and other broadcasters. The distribution business, Global Entertainment, owns the rights to ITV programmes and formats and acquires third-party content.

Top Shareholders
 
(Source: Thomson Reuters)
 
Key Financial Metrics (FY 2018, in £m)

(Source: Company Filings)
 
Key Financial Highlights
Despite the uncertain economic and political environment, the company’s operational performance across 2018 was strong. The total advertising revenue of the group increased by 1% to £1,795 million and total non-advertising revenue, which now accounts for 52% of total revenue, rose by 5% to £1,971 million. Due to strong growth in World and Global Entertainment, an increase of 6% was reported in ITV Studios revenue growth, and Broadcast and Online segment reported a revenue growth of 1%. The total ITV revenue was up by 3% to £3,766 million, against £3,655 million in 2017, with a rise of 3% reported in external revenue at £3,211 million. Adjusted EBITA, driven by the closure of Encore and investment in the schedule for the World Cup, decreased by 4% to £810 million. The EBITA margin also declined by two percentage points to 25% as compared to the last year data. The decline of 7% in Broadcast & Online adjusted EBITA offset the 5% growth in ITV Studios adjusted EBITA.  The statutory profit before tax reported a rise of 13% to £567 million while the adjusted value declined by 4%. This decline was due to a lower adjusted operating profit reported in FY 2018. The diluted adjusted EPS dropped by 4% to 15.4p, though the weighted average diluted number of shares declined year-on-year. The statutory EPS grew by 15% to 11.7p, reflecting a decline in the reduction in exceptional items and net financing costs. Keeping in line with the Board's target to deliver at least an 8p per share dividend per year in 2018 and 2019, the group announced a full year dividend of 8.0p, up 3%, against 7.8p announced in 2017. The company reported a strong balance sheet, supported by a healthy liquidity position, and the company's strategy continues to be highly cash generative. The company ended the year with a net debt of £927 million, against £912 million in 2017. At 31 December 2018 reported net debt to adjusted EBITDA was 1.1x, which provides a more robust business with the implementation of the company's strategy. The company generated £712 million of operational cash, while free cash flow remained healthy in the period at £469 million.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
The company has consistently reported profitability margins above the industry median. The EBITDA margin in 2018 declined to 25.3% due to a decrease in EBITA. However, the net margin increased over the year to 14.6%, reflecting a decline in the reduction in exceptional items and net financing costs. The return on equity continues to remain impressive and further increased in 2018. The liquidity position improved in 2018 and is above the industry median, reflecting the high cash generative business model of the company. Though the company improved its leverage position, it is still considerably higher than the industry median. The group's high asset turnover ratio indicates an optimal use of the company's assets.

Valuation Methodology
Method 1: Price/Earnings Multiple Approach (NTM)  


To compare ITV with its peers, Price/Earnings multiple has been used. The peers are Prosiebensat 1 Media SE(NTM P/E was 6.86), Television Francaise 1 SA (NTM P/E was 10.16),Mediaset Espana Comunicacion SA(NTM P/E was 11.13), Mediaset SpA (NTM P/E was 11.77) and Metropole Television SA(NTM P/E was 12.01). The mean of Price/Earnings (NTM) of the company’s peers was 10.39x.

Method 2: Price/Cash Flow Multiple Approach (NTM)

*All forecasted figures and Peer selection have been taken from the Thomson Reuter.

Share Price Commentary

Daily Chart as at Mar-25-19, before the market close (Source: Thomson Reuters)

On 25th March 2019, at the time of writing (before the market close, at GMT 10:40 am), ITV shares were trading at GBX 129.5, down by 0.5 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 183.10/GBX 121.50. At the time of writing, the share was trading 29.27 per cent lower than its 52w High and 6.58 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 7,516,830.40; 30 days - 10,858,035.27 and 90 days - 12,059,185.77. The average traded volume for 5 days was down by 30.77 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 8.7x as compared to the industry median of 10.5x. The company’s stock beta was 0.96, reflecting the same directional movement of stock with the index. The outstanding market capitalisation was around £5.24 billion and a dividend yield of 6.15 per cent.

Risks Assessment and Growth Prospects
The company operates a sustainable and cash generative business, delivering continued value for shareholders. Though the economic and political uncertainty continues to impact the demand for advertising, the company reported an increase in advertising revenue in 2018, signifying the steady business strategy adopted by the group. The structural demands of the business are also changing, with a turn towards online content. Keeping up with this trend, the company has responded to it; evident from strong viewing performance reported by the company for 2018. However, there is a risk that the company may not be able to adapt to a faster than expected shift towards non-linear viewing. Moreover, advertisers could be impacted by general or sector economic uncertainty and may choose to limit marketing expenses in case of a sustained economic downturn.

Conclusion
The company’s business model and strategy continue to adequately support the company’s target and add value to shareholders. The group is also adapting itself to changing industry which is getting reflected in its financials. Based on strong growth prospects supported by a valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 130.05 (as on 22nd March 2019) with double-digit upside potential based on 12.80x NTM Price/Cash Flow Value (approx.) on FY19E cash flow per share and 10.39x NTM Price/Earnings (approx.) on FY19E earnings per share.
 
*The buy recommendation is valid for the current price as covered in the report (as on Mar-25-19).

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