ITV PLC (LON:ITV) has underperformed the FTSE 100 by 25% in the year to date but its stock is still not cheap enough to own amid weak advertising revenues and a shift in TV audiences to online viewing, according to UBS.
UBS raised its rating to ‘neutral’ from ‘sell’ on valuation grounds but cut its target price to 160p from 170p.
READ: ITV says pressures on advertising income to ease in the third-quarter as it posts in-line first-half results
Since its first half results in July, ITV shares have underperformed the FTSE 100 by 11%. The UK broadcaster reported a 3% decrease in first half revenue to £1.45mln as growth in non-net advertising revenue (NAR) offset a decline in ad revenue.
Despite the share price correction, UBS said ITV is still overvalued. It sees continued weak advertising momentum and cut its forecast for 2017 NAR to a 6% fall from a previously estimated 5% drop, resulting in a 2% cut to 2017-2019 earnings per share.
Content inflation will likely drive margin declines if NAR doesn’t grow, UBS said.
UBS added that UK linear TV audiences are moving to online video steaming services, such as Netflix, which now has 7 mln UK subscribers with the ability to fund content up to US$20mln per hour.
ITV is also wedded to long-running franchises that are in decline, including Coronation Street and Britain's Got Talent, both down 5% in the year to date.
Meanwhile ITV Studios' underlying earnings (EBIT) is stalling, UBS said.
“In fiscal year 2017 we see flat EBIT despite cost-out and foreign exchange gains, due to US Scripted losses, and further believe ITV will struggle to scale Studios in the US.”
Shares in ITV fell 1.32% to 156.50p in afternoon trading.