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ITV is the UK’s largest commercial broadcaster, and one of the very largest players in European TV. But ITV could very much be in the firing line post-Brexit, says a report from equity analysts at investment bank Berenberg.
“If we assume that Brexit affects consumer confidence and spending, and that advertisers respond to this less favourable environment by reducing marketing expenditure, then ITV is clearly exposed. Net Advertising Revenue (NAR) is the key revenue source for ITV in terms of profitability, given that the drop-through to the bottom line is almost 100% on both the upside and the downside,” says the report.
The report adds: “Given the referendum outcome is now less than two weeks old, it is hardly surprising that marketers have not decided what to do. Our conversations with a leading UK media buyer suggest that there has been no knee-jerk reaction, and that advertisers will wait and see what happens before making any major decisions to trim advertising expenditure. For ITV, the advance booking cut-off means there is broad visibility through August, which should be helped by the Olympics.”
However, the bank says that UK consumer confidence is dropping. “The recently published YouGov/CEBR consumer confidence index saw consumer confidence fall to 104.3 between June 23rd and 27th, from 111.9 for the month prior to the vote. This puts the index back at May 2013 levels but above the long-term average of 99.2, and above the level seen in the Lehman-crisis (low 60s) and during the euro-crisis (low 80s). Meanwhile, new car sales went negative in June.”
There’s also bad news over the prospects of cash from retransmission fees. Berenberg says: “While the press has suggested that ITV still hopes to engage in negotiations to generate retransmission fees, we think the government’s position is clear: it expects no net fees payable, and will legislate if it sees a change. We thus continue to believe that ITV will not be able to generate additional fee income from the main channel.”
Berenberg’s advice to investors is to ‘HOLD’ their shares, and gives a target price of 200p (currently ITV trades at about 170p).