Why shares have fallen and what could happen next
Even after a 10% rally since last week’s interims (21 Aug) shares in STV (STVG) could go higher still in light of the Scottish broadcaster’s announcement it intends to resume dividend payments this year.
As is normal in the early phases of a UK economic recovery, advertising revenues are on an improving trajectory. STV noted a 4% advance for the first half and added it was looking for 6% growth in the third quarter. This is a better performance than ITV (ITV), which owns the English ITV Network licences, and justifies STV’s strategy to provide more localised programming in addition to the major network schedule.
High operational gearing, in the form of the fixed costs associated with terrestrial transmitters, means any increase in sales should have a greater impact on the bottom line. Throw in high financial gearing and earnings could rebound very quickly.
A transformation of STV’s growth prospects would also help to erase the 50% valuation discount to nearest peer UTV (UTV), which itself published strong first-half numbers on Tuesday (27 Aug).
Top-performing contrarian investor David Crawford, who runs the City Financial UK Equity Fund, seems to like what he sees. He took a new position in May (see Cover, Shares, 20 Jun).
Based on Edison Investment Research’s estimate for year-end net debt of £36.5 million, a pension deficit of £23 million and 2013 earnings before interest, tax, depreciation and amortisation (Ebitda) of £127.5 million, STV trades on an enterprise value to Ebitda multiple of just 6.4, well below UTV’s 9.3 times rating.
Shares says: At 192p, STV’s recovery should have a lot further to run.
SWOT ANALYSIS
STRENGTHS
• Digital exposure
• Programme-making expertise
• Local focus
WEAKNESSES
• Lofty financial gearing
• Cyclical revenues
• High fixed costs
OPPORTUNITIES
• Improving advertising market
• Further localisation
• Cross-platform distribution
THREATS
• Rising cost of debt
• Increased ITV Network costs
• Economic downturn