Liberum upgraded its recommendation on the stock to ‘buy’ from ‘hold’ and left its target price at 145p as it thinks the risks facing ITV are more than priced into the shares.
“We have not changed our forecasts or our target price but, with the shares now 25% below our target price and 40% below our discounted cash flow valuation, we feel the correction has been too drastic especially as ITV’s secular position is better than the market thinks,” Liberum said.
“Short-term, the first-half results should provide some relief, given 'Love Island' and signs advertisers are shifting spending into ITV1.”
Love Island boost
Liberum noted that ITV's hit reality show Love Island was doing well and making significant share gains in the 16-34 age categories.
The broker expects the benefits of a content deal with Virgin Media and a potential contract with Sky should start to have a “meaningful” impact over the next 12-18 months.
Last July, ITV signed a new three-year retransmission deal with Virgin Media, which Liberum estimated would give the group an extra £40mln of revenues on an annualised basis.
“More importantly, the revenues would effectively be 100% margin giving ITV a £35m boost to pre-tax profits, equivalent to 6.5% of FY19E profits,” Liberum said.
“The benefits of that deal should start coming through in 2H19.”
Possible Sky deal
Liberum thinks the much more important deal would be with Sky.
The broker believes an ITV Sky re-transmission deal is closer after Sky signed a five-year partnership for Scottish ITV1 licence holder's video on demand services and regional channels.
“Timing-wise, we would expect ITV and Sky to conclude talks towards the back end of this year, with the benefits coming through in 2020,” Liberum said.
“On potential uplift, we would still feel comfortable with the estimate of an extra (100% margin) £120mln annualised revenues from a new Sky-ITV deal.”
“A Sky-ITV deal is not factored into estimates but would add over 15% to our 2020 adjusted earnings per share estimate (we also suspect we have been conservative on our estimates of an uplift from the ITV-Virgin Media deal).”
In morning trading, shares in ITV rose 2% to 112p.