Questor share tip: Questor says buy ITV on bid talk

ITV
194.7p +11
Questor says BUY

Britain's largest commercial broadcaster ITV [LON:ITV] was put in play yesterday when rival BSkyB sold its 6.4pc stake to Liberty Global. The shares jumped 7pc higher on the announcement and Questor believes the move underpins the value in the UK Media player.

Markets interpreted the share sale as a sign that ITV might eventually be bought outright by Liberty Global. Steve Liechti, media analyst from broker Investec, said: “Given recent Liberty Global M&A appetite, we see speculation of further M&A as almost inevitable mid-term implying ITV shares are likely to be valued more on a take-over basis.”

Mike Fries, chief executive of Libery Global, said: “This is an opportunistic and attractive investment for us in our largest cable market. ITV is the leading commercial broadcaster in the UK and we’re excited to be shareholders.”

Questor thinks the lady doth protest too much. Liberty Global’s statement that it will not make a full bid could just be a ruse to prevent the shares from rising further, increasing the price they will eventually have to pay. Takeover rules mean Liberty Global, having stated it has no full bid intentions, can't make an offer (unless a rival offer appears) during the next six months.

This opens the interesting question of what ITV shares could be worth if a full offer does materialise. Rupert Murdoch’s bid for Time Warner provides a useful guide for a takeover multiple for the whole of ITV. Applying this multiple to current year earnings forecasts implies a share price of about 215p, or 245p if the multiple is applied to next years earnings, according to Investec.

Broker Panmure Gordon have a target price of 275p on the shares, adding: “We see a well-run company exposed to a strengthening UK economy, at an attractive valuation following recent drift back on UK interest rate concerns.”

Market consensus is for pre-tax profits to jump by 53pc in the current year to £666m, on revenue up by about 8pc to £2.6bn.

Questor agrees with the encouraging outlook for the commercial TV giant and said “Shares in ITV are looking cheap” last year (Buy, 181.25p, September 12).

ITV has delivered steady profit growth in an advertising market that has essentially been flat, so as the UK economy recovers and consumer spending returns the shares are interesting.

ITV delivered a solid first quarter update. Total external revenue edged up 2pc to £585m in the three months ended March, driven by a steady increase in advertising revenue. What’s more, the company said advertising revenue had accelerated in the second quarter with initial estimates for June showing a double digit increase. July should also be boosted by strong World Cup viewing figures.

The company is well placed to drive profits from increased advertising revenue as it has been cutting costs. Management said they were on track to deliver £10m in cost savings for the full year. With higher revenue and lower costs profits should accelerate.

The company also made sensible use of spare cash last year, restructuring the debt with a £100m buyback, making pension fund contributions of £80m, and purchasing the company’s headquarters for £58m.

We are now halfway through the year and ITV have told the market they had a solid start and the bid interest now underpins the share price. The earnings per share are forecast to increase by about 15pc this year to 12.8p. That leaves shares trading on 14.3 times 2014 forecast earnings, falling to 13 times next year. That still looks cheap for a company growing earnings by double digits, add in the bid interest and its still a buy.