Revealed: The FTSE 100 share whose ‘valuation looks very attractive’ right now Revealed: Why ITV shares ‘valuation looks very attractive’

Simon McGarry, senior equity analyst at Cannacord Genuity, has revealed the FTSE 100 stock he thinks is attractively valued right now.

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The share in question is broadcaster ITV.
He commented, ‘{the} Share price historically has..proved overly sensitive to short term advertising headwinds. Despite the clear volatility of short term advertising trends, it is much less so on an annual basis.ITV trades at a discount to nearly all the major EU broadcasters e.g. Mediaset, TF1, M6, Tele5.’
The analyst continued, ‘They are far less risky than immediately pre GFC {Global Financial Crisis} Lower financial leverage having brought net debt/EBITDA down from 3.4{times} in 2008 to 0.7{times}  in 2016. When you include specials {one-off dividends} the shares yield {around} 6 per cent (increasing payout ratio to 50 per cent is being targeted). Given they want to increase leverage, further specials are likely. Revenue streams continue to be diversified with 30 per cent of earnings now from the studios, which should lead to a higher rating. Potential for Liberty Global to increase its stake from 9.9 per cent.

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ITV has long been talked of as a takeover target, and Liberty Global is a US firm with a 9.9 per cent shareholding.

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McGarry opined that while the traditional TV advertising market has been in decline for some time, recent trends towards advertisers deploying revenues to social media at the expense of traditional TV may be in revser.

He noted that consumer giant L’Oreal and the UK government have stopped advertising on Youtube because of the prevalence of what are often called ‘hate videos’ on the site.
McGarry said, ‘This has been another sign of increasing concerns from advertisers about the potential damage to their brands from online advertising. {This} Trend should benefit traditional media as advertisers push spending back towards more trusted channels, which can also offer safe online video content of their own. In the last results season, several European broadcasters stated that they are seeing advertisers shift money back from online to TV over concerns about digital’s ability to deliver trusted audiences. Moreover, the online video offerings of the broadcasters are likely to be attractive – for safety reasons – to those advertisers wishing to advertise online but are concerned about the risks. ITV’s digital, interactive and online revenues grew 23% year-on-year to £231 million in 2016. The margins it receives for these revenues are 60 per cent making it a very profitable source of revenue.’
He continued that revenue growth can also come from what he calls ‘retransmission fees.’
The analyst said, ‘On 5th March ITV won a case over TVCatchup.com, which streamed ITV’s channels for free. The European Court of Justice claimed that TVCatchup.com was not exempt from European copyright laws that allow free retransmission of public service channels over cable. ITV’s court victory could help as a precedent in future retransmission negotiations with Virgin Media. At the moment Virgin Media is benefiting from a copyright exemption under UK law, but this exemption is due to be repealed under the new Digital Economy Bill. Once Section 73 has been repealed we expect ITV to enter into commercial agreements, which should allow ITV to charge retransmission fees to Virgin Media. If ITV charged Virgin Media £1 per month, this would mean an extra  £40 million  revenues at 100 per cent margin (on a base of {around}. 3 million subs), equivalent to an {approximate}. 4 per cent earnings boost. However, assuming ITV could charge Sky at the same rate (which will have to come well after any Virgin settlement), brokers have estimated an uplift of {around}. £140 million, or 17 per cent.’
ITV shares have been poor performers over the past year, dropping from £2.40 to £2.09 at the time of writing.

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