ITV is left holding the blue-chip wooden spoon this morning with investors balking at FY17 results and ditching the shares. This morning’s weakness has reversed yesterday’s breakout, fuelled by hopes of a Comcast/Fox/Disney bidding war for Sky, inciting interest in UK broadcasting assets, sending the shares below prior Feb lows to trade levels last seen at end Nov.

Despite management suggesting a great start to 2018, with a World Cup benefit looming in Q2, this hasn’t cut the mustard, with several negatives weighing;

1. Revenues +4% but adjusted EBITDA -5% and PBT -6% (statutory -10%) means unsightly margin contraction.
2. Total 2018 & ‘19 schedule costs of £1.055bn and £1.1bn, respectively, are much higher than consensus, meaning it could overpay for Sports/Drama to compete with pay TV/On-Demand rivals
3. Net Advertising Revenues (NAR) -5% were hit by political and economic uncertainty – difficult to see this evaporating any time soon – hence pedestrian guidance of just 1% in Q1 and merely ‘positive’ for H1.
4. Biggest revenue generator Broadcast & Online (56% of total revs) posting growth -3%, and half the 13% Studio revenue flattered by a weak GBP (organic +7%) is a concern and subsequent FX moves could dent 2018 revenues and profits.
5. Profitability trends were even worse, with Broadcast & Online EBITA -7% and Studios merely flat, hence the poor group margins.
6. Having taken action to reduce overheads, uncertainty delivered a big dent to advertising strongly, and now the company has decided to spend more.
7. A strategic refresh suggests urgent need for action to fight fierce competition but it also represents a risk of any decision failing to pay off or overspending.
8. The final dividend may well have been hiked by a handsome 7.8% (echoing other corporates), but now FY dividends are back to more ‘normal’ levels, the specials are off the menu.
9. It’s difficult to see how what was a challenging 2017 environment can improve markedly in 2018, both form a sporting and political.
10. If it all hinges on England’s football performance, don’t go looking at 2014’s performance. It topped the group in qualifying there too, but still finished last behind Costa Rica

Shares off lows (-9.2% at one point), but much work to do for new CEO Dame Carolyn McCall (prev. easyJet) to convince that the shares merit a northerly break above 2018 bugbear resistance at 175p and a break above 2yr falling highs at 190p.

Mike van Dulken, Head of Research, 28 Feb 2018