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.
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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.
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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.