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ITV - still backing my CEO crush

By Chris Bailey | Wednesday 28 February 2018

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Obviously great excitement at Bailey Towers today as Carolyn McCall hosted her first results presentation as CEO of ITV (ITV). I professed my attraction to capabilities back in mid-November, when I observed that the bear case for the stock was overstated. Even though the shares have fallen back 5% today, we have lifted off that low point which is pleasing to see. So what's the tone of the update?

The first observation has to be that Ms McCall - in the manner of a typical incoming CEO - is undertaking a Strategic Refresh (out in six months time) which seeks to answer questions about ITV's future relationships with its key advertising customers, as a content provider and in interaction with consumers, to help set the company up for the next five years.

As for historic and current trading, I was heartened to see net advertising revenue pushing back to growth in Q4 and having a positive start to 2018. Of course, given the shabby start for advertising revenue that occurred in 2017, earnings were down mid-single digit percentage year-on-year depending on your preferred statistic. However the dividend perked up another 8% and the share now yields around 4.7% which is not too shabby (and well covered by the current 7%+ free cash flow yield).

I think there was some disappointment that the company has moved away from paying a special dividend as it wants to keep debt below a (still prudent in my view) x1 ebitda level (and it is not as if it has much in the way of a pension deficit either), but in my view a 'special dividend' should not be a constant (the clue is in the descriptive phrase!).

I think the market was also slightly perturbed about the guidance that 2018 and 2019 schedule costs were likely to be around £1.1 billion (when previously it had kept it to £1bn), mentioning 'higher sports costs and drama spend, as we deliver more value as an integrated producer broadcaster creating, owning and distributing our own content'.

I am sure all of this will be a real focus of the ‘Strategic Refresh’. For me, the Studios business continues to be a real star and the source of much future value. Having to spend a bit to generate more sounds reasonable to me...and as we saw yesterday with Sky (SKY) I think people pay up for content - a point no doubt not lost on the 10% shareholder Liberty Media.

Do I remain optimistic? Absolutely. This is still a share to own balanced between content, yield, a barely double digit EV:ebita valuation, World Cup related scope and management competence. Oh and Liberty Media might do the decent thing for shareholders and make a full bid. An even smarter move would be for them to keep Carolyn McCall as CEO...naturally.

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