ITV repeats dividend special but expects advertising revenues to stumble
ITV reported a sizeable slowdown in revenues in the second half of 2016 and warned that advertising revenues would fall in the early months of 2017.
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With broadcast and online revenue down 1% over the year, total turnover rose 4% to £3.5bn thanks to 13% growth from the smaller ITV Studios television production arm, which was less than half the growth rate in the first half of the year.
Underlying profit before tax was just above flat at £847m and adjusted earnings per share up 3% to 17p.
Due to restructuring and earnout costs, statutory EPS fell 10% to 11.2p as statutory PBT dropped 14% to £553m.
Free cash flow was up 13% to £636m and the FTSE 100 group ended the year with net debt of £637m.
As he continues with the strategy of rebalancing the broadcaster away from a reliance on advertising revenues, chief executive Adam Crozier hailed the "good performance" despite a 3% decline in spot advertising revenues that he said resulted from "wider political and economic uncertainty".
But he said ITV's share of UK television advertising revenues (NAR) would be down "around 6% over the first four months against the backdrop of current economic uncertainty" but added that "over the full year we expect to again outperform our estimate of the television advertising market".
But while he suggested political and economic uncertainty was not impacting advertising revenues as much as it had originally expected, analysts were less optimistic the market will bounce back in the spring.
To try and keep investors onside, the board not only proposed a final dividend of 4.8p, meaning the full year dividend will be up 20% on the previous year at 7.2p, but also a special dividend of 5.0p per share, "reflecting ITV's strong cash generation and the board's confidence in the business". This was half the level of last year's special divi.
Looking forward, Crozier said ITV Studios was seen returning to "good organic revenue growth" in the current year, helped by increased investment in US scripted content including Somewhere Between, The Good Witch, Sun Records and Snowpiercer.
However, with the reversal of the one-off benefit of The Voice of China in 2016, Studios profits in 2017 are likely to only be "broadly in line" with last year, though he expects the Online, Pay & Interactive arm to perform strongly as it is boosted by the launch of BritBox, a new US joint venture with the BBC.
"We see a good pipeline of investment opportunities across ITV, organically and through acquisitions, and our strong balance sheet and healthy cash flow allows us to take advantage of these while delivering sustainable returns to our shareholders," Crozier said.
Mixed reaction
Shares in the company wavered initially but by 1100 GMT were up 2% to 206.44p.
Analysts said the results were solid but noted that the ad sales decline was marked.
Broker Numis said the results were slightly ahead of its expectations, with EPS of 17p versus the consensus estimate of 16.4p and its hope but not expectation of a special dividend.
But the advertising outlook for the period to April 2017 was "slightly worse than our expectations" and saw it edge down full year NAR estimate to -4% from -3%.
While the balance sheet and cash generation look strong enough to continue the spending spree and dividend plan, Neil Wilson at ETX Capital said for investors "all of the same old doubts" remained.
Although pre-tax profits dropped 14% as net advertising revenues declined by 3%, in line with what the company said in November, Wilson said: "This matters because a 1% drop in NAR equates to a roughly 3% fall in earnings. The first fall in ad sales since the financial crisis should be a cause for concern – just as well ITV is diving headlong into content production to keep up with cord cutters."
He said the 6% decline in the early part of 2017 was "pretty much as expected" but with the government about to trigger Article 50 and the likely uncertainty that will create, "it’s going to be hard to see this pick up meaningfully throughout the rest of 2017".
The persistent expectation that ITV remains a prime takeover target will keep the City talking and, Wilson said, "should continue to act as a floor under the share price even while ad sales drop".
Analyst George Salmon at Hargreaves Lansdown addressed another consequence of falling ad sales.
"This brings concern on two fronts. The first, that customers are less likely to splash out on TV ad campaigns when the economic outlook is uncertain, is hopefully a short term worry. The second problem, however, is potentially more endemic.
"ITV is the by far the biggest ad-based venue to draw in a mass audience, but longer-term viewing habits are clearly moving towards a more on-demand set up. This brings the group into competition with Amazon and Netflix, two pretty bruising rivals with deep pockets. While continuing to provide entertaining content is obviously essential, building a slick online platform could be just as important."
Broker Shore Capital was pleased by the results and said: "With NAR comps softening from Q3 onwards we do not expect to make any substantial changes to our current forecasts".