Interactive Investor

Goldman Sachs backs ITV

5th March 2015 13:10

Harriet Mann from interactive investor

Those who jumped into ITV after its full-year results should buckle up for a year of outperformance, as the broadcaster is poised to benefit from attractive macro events and a larger share of the advertising market in 2015. Well, that's the view of Goldman Sachs, which reckons a good buying opportunity has cropped up following a disappointing performance so far this year.

At 222p (prior to its results. Now 241p) ITV had underperformed its sector by 9% and German rival ProSieben by 21%, causing the forward price/earnings (P/E) discount between it and ProSieben to widen to around 25%.

"We see this as a good buying opportunity in a well-positioned company on a 13.3x 2016E P/E despite 2014-2017 compound annual growth rate of 6% for organic growth and 15% for EPS, and 5% dividend yield," said Goldman.

Thanks to the World Cup and successful shows, ITV enjoyed its fifth consecutive year of double-digit profit growth in 2014 - pre-tax profit rose by a fifth, driving earnings per share 23% higher to 13.8p. News of a special dividend excited the City, too.

Some worry about how the upcoming General Election will impact the advertising market, but after better-than-expected ad data for last year, Goldman is confident that budgets for its key categories will not be materially affected. Ad revenue in 2014 rose 6% to £1.6 billion, the lion’s share of its total income.

"As the only major EU content exposure, we believe ITV is best placed to benefit from the rising value of content and likely to be viewed as a strategic asset," Goldman explains.

Trends could remain negative ahead of the BBC charter renewal, but ITV's pipeline of shows and the Rugby World Cup is expected to help its ratings and the company should benefit by around £25 million as the government rethinks its retransmission fees.

Goldman Sachs has upped its forecasts and promoted the stock to its "Conviction List", expecting returns of up to 28% (from 222p). From forecast revenue of £2.8 billion in 2015, the broker reckons ITV can generate an operating profit of £738 million, up from £651 million in 2014.

"On our new estimates, our 12-month price target increases to 284p (from 253p) based on our P/E valuation at 15x 2016E and an M&A valuation at 17.1x 2016E P/E (30% avg historical M&A premium paid in the sector)."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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