ITV rockets despite Brexit threat

ITV has become the latest British corporation to warn against the dangers of Brexit's financial fallout and pledge to slash costs. The broadcaster had a strong first half, however, with decent profit growth against the uncertain referendum backdrop.

Granted, visibility is low in a cyclical downturn, but ITV has made the right choices so far and the shares are soaring.

Total revenue rose 11% to £1.5 billion in the six months to 30 June, driven by 26% growth in non-advertising revenue (non-NAR) to £874 million. Sales from its ITV Studios business jumped by over 30% to £651 million thanks to the acquisitions of Talpa Media, Twofour Group and Mammoth Screen. Online, Pay and Interactive sales rallied by a quarter to £107 million.

Hit by uncertainty over the Brexit vote, net advertising turnover was flat at £838 million and management warns this measure could fall 1% in the nine months to the end of September - this is better than many would have feared, however. So management says it will slash overhead costs by £25 million in 2017.

Underpinned by a more profitable ITV Studios division, double-digit growth took adjusted cash earnings to £438 million across the group, with pre-tax profit up 9% to £425 million and earnings per share (EPS) jumping to 8.5p. Cash profit rose by 42% to £121 million and ITV is on track to deliver double-digit growth in revenue and profit this year.

"We would view this as attractive for a stock which is in a cyclical downturn, but continues to offer sound fundamentals (as evidenced by the first-half SOV performance) and long-term strategic attractions in a consolidating UK TV market," explains Panmure Gordon analyst Jonathan Helliwell.

"While we concede that near term visibility remains low, we see good long-term cyclical value in ITV and maintain our positive stance."

ITV has performed well on-screen, too, with its "share of viewing" up 7% and video consumption up 50%. Unfortunately, the screening of the Olympics on BBC is expected to dent viewing this summer.

With a strong balance sheet and high cash conversion, ITV has room for more investment over the rest of the year and has declared a 26% hike in its interim dividend to 2.4p, as expected.

The group makes a lot of cash: profit to cash ratio was 86% in the first half, with free cash flow up 9% at £269 million. Acquisition spend of £97 million, special dividends and pension deficit contribution took net debt to £796 million from £319 million at the end of 2015.

"We have a clear strategy in place to rebalance and strengthen the business which remains the right one for ITV. We have a strong balance sheet and the capacity to continue to invest behind our strategy, while at the same time delivering returns to our shareholders," said the company.

Numis has downgraded its 2016 full-year forecasts by 6% to £850 million, giving EPS of 16.6p, and by 5% for 2017 to £900 million, giving 17.5p. "This is better than our downside sensitivity analysis of 16.0p and 15.3p, respectively," notes analyst Paul Richards.

The technicals

Stuck in a bearish trading channel throughout 2016, ITV's share price appeared ready for a break-out when Britain went to the polls in June. We all know what happened next, and ITV was nursing year-to-date losses of 50% at one point last month.

Bargain hunters who bought in at the post-referendum low have been rewarded, though, with the shares climbing 29% and back into the channel. They're up 10% to 203p Wednesday and Numis is confident tips the shares up to 215p.

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