Brexit fear whacks ITV ad sales

As we drift closer to June's European referendum and the warring camps ramp up their polemics, advertisers are tightening their purse strings. This is bad news for ITV, which relies heavily on ad money.

Although the broadcaster of X Factor and The Durrells has worked hard to rebalance the business and investors should see profitable growth this year, it hasn't prevented a round of earnings downgrades sending to shares back to early-2015 prices.

Total revenue rose 14% to £755 million in the first three months of the year, as nervous advertisers continued to scale back spending, keeping net advertising revenue (NAR) flat. It slumped by 13% in April and is tipped by ITV to be flat this month. Its forecast of 15% growth in June had better be right.

Paul Richards at Numis Securities remains an ITV fan, but he's still cut estimates for pre-tax profit in 2016 by 3% to £900 million, giving earnings per share (EPS) of 17.4p. Guidance for 2017 gets the red pen treatment, too, with profit of £950 million and EPS of 18.3p, also 3% lower than before.

Granted, this makes uncomfortable reading, but the ad sales decline is still modest next to the 15% crash during the financial crisis. Profits have also trebled since, broadcast margins have doubled, and the balance sheet is significantly stronger. "[This positions] ITV far, far better to withstand any further pressure on advertising," argues Richards.

And the business elements ITV can control are doing well. Strip out advertising revenue and sales jumped by over a third to £428 million. Acquisitions drove ITV Studios revenue 44% higher to £322 million in the opening quarter, and a good programme pipeline means ITV still expects double-digit revenue and profit growth at Studios, double-digit sales growth at the Online, Pay and Interactive division, and for the group to outperform the UK TV ad market.

Boss Adam Crozier is confident the diverse business can deliver good profit growth in the first half, even though Family NAR is likely to remain flat - but ahead of the market - in the first six months.

After stabilising at around 240p in March/April, ITV's market value has shrunk by another 14% over the last month. Slipping 2% Thursday to less than 210p, the shares are fast-approaching bearish trendline support. They haven't been that low since January last year.

Underperforming the market by around a fifth in the past 12 months, the shares now trade on 12 times forward earnings, which falls to 11 times on 2017 forecasts. That looks modest and compares with a rating of 15 times late 2015, although earnings are only tipped to grow by mid-single-digits this year and next.

Richards remains optimistic and reckons the shares will recover to 255p once concerns over Brexit abate. That's down from his previous target of 300p, but offers 21% potential upside from current levels.

"We see scope for advertising to rebound when Brexit uncertainty is resolved and stress that with a far greater base of profitability and transformed balance sheet, ITV is much better placed to weather a downturn than in 2008," says the analyst.

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