UK broadcaster ITV (LSE:ITV) has had a spectacular month, up 20% since the last day of February. Now trading at 71p, it’s the highest the shares have traded at in almost six months.
The gains follow news that the firm has been considering selling a stake in its production arm, ITV Studios. The production house is responsible for popular British TV shows like Love Island and Coronation Street. According to reports, ITV has already been approached by several private equity-backed media entities.
Hollywood interest
One such entity is American film and TV producer Peter Chernin, who reportedly expressed interest in the operation last month. Chernin served as CEO of major Hollywood film company Fox Group until 2009. He has since gone independent, releasing Oscar-nominated productions like Ford v Ferrari under his label Chernin Entertainment.
Chatter online reflects a belief that a partnership between the two studios could create a ‘super studio’ in the UK.
The big guns are on board
News of the Hollywood connection hasn’t gone unnoticed, piquing the interest of some of the world’s largest financial institutions.
On 8 March, JP Morgan reiterated an ‘overweight’ rating on ITV, with a price target of 140p. This came one day after Numis Securities reiterated its buy rating on the stock.
Besides the news, these calls were likely influenced by the promising full-year results released the day before. ITV reported a 4% increase in revenue for its Studios arm, with EBITDA (earnings before interest, tax, depreciation and amortisation) up 10%. Furthermore, its online streaming service ITVX recorded a 19% increase in revenue.
Risks
While the recent share price gains are impressive, the firm’s financials reveal some worrying figures.
In the most recent full-year earnings results released on 7 March, net profit margins were down from 11.5% last year to 5.8% this time. ITV reported net income of £210m, down from £428m in the previous year.
Not exactly promising. But the high-yield dividend is a huge plus, right? Well, maybe not.
With a 7% yield, dividends are currently paid out at 5p per share. However, with earnings per share (EPS) at only 5.2p, the payout ratio is 96% and the dividend isn’t well covered. This figure is down from EPS of 10.6p a year ago.
Such a high payout ratio increases the likelihood of cutting dividend payments if the board chooses to reinvest earnings. This is compounded by EPS falling at a rate of 7% annually for the past three years.
My verdict
It seems ITV Studios and its digital arm ITVX are shoring up the company while losses are being recorded elsewhere. For now, at least, its future seems reliant on these two sectors of the business.
But even though no definitive deal has been announced yet, some major brokers already seem confident that ITV could do well. Sentiment suggests a deal with a major studio could boost the company’s recovery and prompt further growth from here.
As yet, nothing is set in stone but investors should keep an eye on how things develop. If a lucrative deal comes through, ITV could make a good addition to a portfolio.
