Berenberg gloomy on ITV prospects

Analysts at Berenberg have reduced their price target for ITV shares and published a ‘hold’ recommendation on concerns about profitability next year as a downturn in the advertising market bites and the UK commercial broadcaster ups investment.

Berenberg predicts that ITV’s advertising revenue will fall by about 1.5% this year, more than the 1% previously assumed. The analysts said that conversations with media buyers had convinced them that the UK TV ad market is weakening, even if ITV continues to hold its own in terms of commercial share.

Berenberg has factored in an estimated 4% decline in the ad market in Q4, which it said “does not bode well for next year”, when there will be fewer high-profile sports events to boost performance. Brexit is also likely to weigh negatively on the market.

ITV CEO Carolyn McCall has said the commercial broadcaster will invest £25 million (€28 million) this year to grow online and direct-to-consumer revenues as well as delivering 5% compound annual growth in production. While higher investment may make sense strategically, it is unlikely to offset softening ad revenues, said Berenberg, and will entail greater risk, which will also likely alienate investors.

In a generally negative assessment of ITV’s prospects, Berenberg’s analysts noted that the commercial broadcaster’s business faces structural pressures as advertisers switch to online. They said that further cost-cutting would be difficult to sustain and noted that a highly-geared business like ITV would see earnings suffer if ad revenues decline.

“For ITV to counteract fears of the long-term demise of its linear TV business, it needs to deliver significant change, in our view, and £25m is not a large investment, particularly when we consider the magnitude of the budgets being exploited by Netflix, Facebook Video and the like,” said Berenberg.

ITV is set to hold its first Capital Markets Day in a number of years this week, where it is expected to highlight its plans to become a more integrated producer-broadcaster with a strong online presence, as well as to grow direct-to-consumer initiatives.