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Investment Management Theory: ITV Analysis
ITV has been the largest and most popular commercial television for over 50 years. In 2004 ITV plc formed with the merger of Granada and Carlton allowing both companies to combine their respective competitive advantages against other broadcasters. ITV is now available on every major platform, including broadcast TV, online and on mobile. The Company's production arm (ITV Productions) is the biggest commercial television production company in the UK and one of Europe's largest programme distributors.
The company operates three core business units:
- Content business
- Consumer and online
|Strong production arm UK's biggest broadcast window Leading position in cinema screen advertising||Limited presence outside the U.K. Low profit margins|
|Acquisition of enable media Launch of new channels||Intense competition BBC could enter the advertising market|
Strong production arm
The strong production platform operating under Granada, has continued to create ITV's most popular programmes. ITV1 broadcasted eight of the top ten in the U.K. in 2006. The most popular entertainment programme is Coronation street, which attracted an audience of 11.4 million people in one episode, which is an incredible 53.1% share of the television market. Coronation street was a top performing soap throughout years, having an average viewer ship of 9.4 million and 46.6% share of the UK television market. ITV's other successful product is Emmerdale, which attracted an average audience of 7.1 million and 35.9% of share of the television market. Emmerdale has consistently competed with BBC's soap drama Eastenders, and has won awards against it. The popularity of ITV's production arm has generated greater advertising revenues such as Cadbury's, in addition the company has improved the share of the television market.
Leading position in cinema screen advertising
The company has established a lead position in cinema screen advertising in the UK and the Republic of Ireland. The company advertises through 2,200 screens in the UK television market and held a share of 75% of the UK cinema screen advertising market in 2005 to 2006. This leading position helps the company gain more film and TV rights, which are distributed through Carlton Screen Advertising. The company's leading market position provides it with a strong brand name, and helps it in improving its top line performance.
UK biggest broadcast window
The company has turned programmes into hits on ITV1 & ITV2, the UK's biggest broadcast window, this includes programmes such as Pop Idol, The X-Factor, and Who wants to be a millionaire. These shows have been a great success with the help of ITV broadcast window, allowing the programmes to reach all audiences nationwide and win appeal.
Limited presence outside the UK
The company primarily operates in the UK with only a small portion of revenues coming from international markets. In the fiscal year 2006, 92% of its revenues were drawn from the UK. The company has not been able to expand its presence overseas. It lacks a presence in newer hemerging markets which prevents it growth opportunities, despite its strong production arm.
Low profit margins
ITV's operating margin and net profit margin for the period 2005-2006 were 8.82% and 8.785 respectively, which was lower than industry averages of 13.98% and 9.35% respectively for the same period. In comparison, its close competitor British Sky broadcasting has an operating margin of 17.91% and a net profit margin of 10.97% for the same period. These low margins can adversely affect the company's long-term financial position.
Launch of new channels
The introduction of new channels provides a distribution platform to recycle high cost and quality programmes that have already been expensed on first transmission. The company has the opportunity to broadcast its old productions through new channels. ITV has made a large contribution to the growth of multi-channel television, with the launch of ITV2 in 1998, ITV3 in 2004, and ITV4 in 2005. In 2005 it introduced the childrens channel CITV, and two repeat channels ITV2+1 and ITV3+1 which could help the company in increasing its audience. This could also help the company increase its revenue through the distribution of its programmes.
Acquisition of enable media
ITV acquired Enable Media (business directory service) in 2006. The on-line business directory listings sector is market estimated to be worth around £150 million, and is projected to grow by 20% in 2007 with strong growth thereafter. Through the acquisition of Enable Media, ITV could expand its product portfolio and target new customers in addition to increasing its revenue base.
ITV is facing intense competition from other broadcasting, production, and media companies. There are now more channels to choose from, digital television has put immense pressure on ITV network ratings and advertising revenues. The threat to channel 3advertising revenues has also led the company's franchises to increasingly diversify their business. The company faces competition from players such as British Broadcasting Corporation (BBC), British Sky Broadcasting (BSkyB), PTV, RTL, Daily Mail, and Virgin Media Television. Furthermore, the company also faces tough competition from non-conventional players such as youTube and channel 4, which offer entertainment content on the internet. Therefore these threats could lead to challenges in sustaining or increasing market share and revenues.
BBC could enter the advertising market
The BBC is currently not allowed to advertise commercially but its charter renewal in future could allow the company to advertise. This would intensify competition for advertising revenues. Advertising accounted 41% of total revenues of the company. Therefore a part or complete change in the charter could have a significant impact on ITV's performance.
Cash-flow Statement Analysis
In 2007, cash reserves at ITV plc fell by £463.0M. As a percent of revenues, this was among the worst results by any company in the Media industry. By looking at the Cash Flow Statement, analysts can easily see the sources and use of cash generated throughout the year. Cash Flow from Operations (CFO) of £317M is the only sustainable source of cash and represents earnings from the day-to-day business of a company. In 2007, this company earned £210.0M from its operations for a Cash Flow Margin of 0.10%. Cash Flow from Investing (CFI) is a measure of the cash used to maintain and grow the business, also called Capital Expenditures, or CAPEX. In 2007, CFI totaled £5.0M, indicating this company earned more from the sale of existing assets than it spent on the purchase of new assets. Cash Flow from Financing (CFF) describes the inflows and outflows between a company and its owners or creditors (although interest paid is part of CFO). In 2007, CFF was negative, which tells investors that this company did not need to attract significant financing from outside sources.
This year Fitch plc the ratings firm has assigned improved ratings on the companies credit worthiness, as long-term issuer default rating is allocated to BBB, and its short-term issuer default rating is F3, and lastly affirming senior unsecured debt as BBB.
Fitch advised the companies improved ratings and outlook are supported by its very strong liquidity position, which gives it significant flexibility to navigate a downturn and added that the ratings continue to reflect the company's position as the UK's leading commercial broadcaster in terms of viewing share.
- The company has created high quality and valuable original programming and content through its production platform (ITV Productions), its soap hits such as Emmerdale and coronation street which have won the appeal of British viewers. These soaps have become long-term assets of the company with added premium value due to regular and mass audiences.
- On the back of hit programmes, building mass-market brand value for advertisers
- Enduring popularity of original UK content
- Size matters for advertisers and audiences
- Long-term value of television advertising
- Access to new revenue streams
- Regulatory opportunity