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Back In Town

18 August 2020

Back In Town

An unscheduled visit to the office on Thursday, necessitated by a thunderbolt blowing out the internet for most of the village on Wednesday evening, allowed me to see how the capital is recovering. I was pleasantly surprised by the numbers out and about but sad to see so many small enterprises closed. Train services are half what they were and not that full and, although the majority wore masks, the numbers fell well short of 100%. The cabby was happy because, like me, many are using his services rather than risk the tube. When I reached the office it was virtually empty. Lunch was a struggle for those of us who are not keen on Pret. It was all rather strange.

Boris’s government is accused daily of mistakes in its handing of Covid and you cannot deny plenty have been made. However, until this horrible virus has run its course I don’t really think it pays to keep on comparing numbers with other nations. Some look to have got it right early on but are now seeing sharp increases that look like a potential second wave. Have they made later mistakes? Who knows. Only once we are able to look at the entire event in hindsight will we really be able to see who was right and who was wrong. Until then I will just be doing what I can to keep me and everyone else I meet safe. If we do want to look at the entire event in hindsight we should all be doing the same.

 ITV – Revisiting an old favourite

How time flies. It really doesn’t seem a year ago that we joined Dowgate. And it only feels like three or four years ago that I last recommended ITV whilst at Walker Crips at a little below current levels but upon investigation I see it was nearer seven. Adam Crozier and Archie Norman were in the process of knocking the business into shape and they did a magnificent job, as evidenced by a share price that multiplied more than four times over the following few years as well as returning cash to shareholders by way of special dividends.

When Carolyn McCall took on the role of CEO in 2018 ITV was already feeling the pressure of the changing media landscape. The impact of streaming, particularly amongst the younger generations, was taking its toll on audience figures and advertising revenues and this has become a growing phenomenon. ITV’s Britbox joint venture with BBC allows it to participate in this area although it is a bit early to measure its success. At least it is in the game and the numbers are moving in the right direction so far.

ITV’s production division is where the real growth has been over recent years and, although Covid has dented the numbers over recent months as activity was interrupted, it is improving again and I read that 70% of production has restarted. Advertising revenues have also steadily improved from the low point. The company is looking to generate savings of £60m which will hopefully offset the increased costs of working with Covid.

ITV is not a Google or an Apple or a Microsoft. It is not offering cutting edge technology. It is, however, a stock with a relatively solid business and a quality and respected production division. There is always a market for quality content.

There is a price for everything and, assuming life does return to normal in the next year or two, I suggest that ITV has reached that price. At 62p the shares look to be on a multiple of around 7.5 times this year’s depressed earnings. The production side should continue to gradually improve but advertising is very geared to the economy and carries a higher degree of risk. In normal times ITV would be a medium risk investment but, due to the operational gearing in advertising and the extraordinary economic conditions, it is probably medium/high currently. However, for those willing to take the view that the economy will recover over the next year or two ITV could prove to be very cheap on a single figure current year P/E. I don’t think you will treble or quadruple your money this time around but even a return to an earnings multiple of say 12 (still quite modest in normal times) based on this year’s prospective figure, would see them at 100p.