The overwhelming elephant in the room for broadcaster ITV plc (LON:ITV) is Brexit and the impact it will have on advertising revenue, Liberum said as it cut its target price on the shares.
In February, ITV warned Brexit uncertainty and no World Cup football boost would hold back profits in the first half of 2019.
The broadcaster said it expects advertising revenues to fall by 3-4% year-on-year in the first four months of the year as companies become more reluctant to pay for ad campaigns until there is more clarity on Brexit.
READ: No World Cup boost and Brexit uncertainty to dent ITV’s first-half profits
Liberum expects ITV’s total advertising revenues will drop 3.7% in 2019, compared to its previous forecast for a 1.2% increase.
The broker also cut its forecast for adjusted earnings per share in 2019 by 16% to 13p and lowered its estimate for 2020 by 17% to 15.3p.
Advertisers likely to hold back on spending
Liberum thinks advertisers are likely to hold back on spending until there is more certainty about the UK’s departure from the European Union.
“Our concern is that advertisers will look for excuses not to spend on TV until there is more clarity and that, given our view that Brexit will not be resolved satisfactorily for several months at least and there will be political uncertainty, advertising will be weak,” it said.
To reflect the reduced earnings and revenue guidance, Liberum lowered its target price to 190p from 240p.
However, it maintained a ‘buy’ rating, saying: “In a number of ways, ITV’s secular position is better than it has been for a number of years: while overall TV viewing is down, its absolute viewing, as well as its viewing share is up; its content arm is in a strong position to benefit from the increasing demand for premium content; there is a very big opportunity in the AVOD (advertising video on demand) market, including the chance to move into the SME advertising space; and the company has an increasing number of monetisation routes.”
ITV’s absolute TV viewing rose 3% to 17.1bn views last year, although this was supported by the World Cup.
However, the growth has continued into 2019, with ITV1 viewing up 4.5% in the year to date.
Opportunity in advertising video on demand
Liberum sees a “huge opportunity” for ITV in AVOD, which the broker estimates makes up more than 10% of total advertising revenues and expects will grow 35% in 2019.
ITV has a 6%-7% share of the AVOD market, compared to a 45% share of the TV ad market.
Content revenues are also rising strongly, Liberum said, adding that the “growing proliferation of streaming services (including Apple’s TV+) suggests a growing demand globally for premium content, which ITV should be in a position to exploit”.
The broker expects a 7% increase content revenues in 2019.
Britbox makes sense, says Liberum
ITV plans to launch a subscription video on demand service with the BBC called Britbox. The service will form the bulk of ITV’s £25mln net investment this year and £40mln in 2020.
“Our view is that, on balance, Britbox makes sense and adds another potential revenue stream (we forecast Britbox UK is profitable from 2022E) but ITV has to be careful of several aspects namely (1) it keeps its ambitions relatively modest. If Britbox sees itself as the new Netflix, that raises the risk of significant extra investment; (2) that ITV does not end up bearing the brunt of the costs, with the BBC hiding behind claims that its public status and the licence fee precludes it from investing and (3) that the service is not impacted by public questioning of why it should play [sic] for BBC-related content when it is already paying the licence fee,” Liberum said.
In morning trading, shares in ITV edged down 0.3% to 126.75p.