ITV plc (LON:ITV) saw its shares rally on Friday, having dropped back sharply in the previous session in reaction to a downgrade in rating by BofA Merrill Lynch, with Liberum Capital reiterating its ‘buy’ stance on the stock and refuting some of the US bank’s arguments.
Liberum noted that the US bank’s downgrade of ITV to ‘underperform’ from 'buy', with a reduced target price of 110p down from 210p, came in a European broadcasting review talking about the decline of linear TV hitting the sector.
READ: ITV hit by BofA Merrill Lynch downgrade in cautious European broadcasting review
However, Liberum’s analysts provided a few counterpoints to BofA Merrill Lynch’s argument.
Firstly, they said: “We already know 1H is likely to be impacted by Brexit – Jan / Feb are reportedly up slightly (although this may include VOD - Video On Demand).
“There has been talk of March being down 25% as advertisers shift advertising spending to 2H. However, as ITV has eliminated its late booking penalties fees, there has been a trend towards advertisers booking money later and later.
“This may be a consequence of that (and note media buyers got the World Cup boost to ITV in June wrong by around 10-15%).”
All priced in
Secondly, the Liberum analysts added: “This is all priced in – if we took ITV’s TV advertising revenues down 10% for 2019 (2009 was -8.3%), and didn’t assume ANY cost-cutting, ITV is priced at just over 11x adjusted FY19E PE
On a third point, they said ITV is still the only medium to deliver mass market audiences. Shows like Coronation Street, Emmerdale, I’m a Celebrity etc. are seeing stabilising or increasing absolute audience numbers.
And finally, the analysts said ITV is making inroads to the VOD market, with 2018 VOD revenues probably up close to 50%.
They added: “We have written about this extensively but it is already improving ITV’s total advertising numbers by c. 2%. Bloomberg also stated that ITV is the top M&A target in Europe – it is for the third year in a row but it highlights its potential attractiveness.”
In mid-morning trading, ITV shares were 2.7% higher at 132.55p, having shed 6% on Thursday, with Liberum maintaining a 260p target price on the stock.