ITV’s comeback storyline loses the plot

ITV's advertising revenues were no worse than expectations but now production sales are looking shaky

ITV’s comeback storyline loses the plot

ITV’s viewing metrics, and broadcast and online revenue met low expectations in the half year. But underlying TV production revenues were surprisingly poor. The timing of investment in full-scale U.S. drama plus an unfavourable comparison with the same interim a year before did not help. A drop of the stock by as much as 7% earlier now looks like an overreaction, particularly as full-year guidance is unchanged but the spotlight has still been trained back on questions over the credibility of ITV’s storyline for growth. That’s because whilst Studios revenues rose 9%, adjusted core earnings (EBITA) fell 9% for the reasons above. Guidance for the rest of the year hasn’t changed, but some investors have quickly changed their minds on the outlook. True, the big worry of the last year or so—advertising revenue—looks, if not solved, at least contained. Lost revenue from key sectors like supermarkets has partially returned and some replaced. But the logic of ITV’s survival in a world dominated by Netflix, Amazon, Sky and others is more difficult to stand up. At the same time expenses are rising, notably after the from the temporary move out of the South Bank to White City, requiring costly facilities upgrades at both premises. The mooted cost is as much as £10m next year looking at some City forecasts, falling to no less than £5m for each subsequent year at TVC. This scenario of  rising expenses, still fragile ad revenues and new uncertainty over studios, which had hitherto helped investors forgive soft ad sales.

Elsewhere, Peter Bazalgette has held ITV’s line about potential Liberty interest almost to the end of his CEO tenure. The acquisitive vehicle controlled by John Maloney is still ITV’s biggest corporate investor with 9.90% stake. The holding helps explain for many seemingly unaccountable rebounds by the shares, like an 11% sprint over September-October. Continued lack of corroboration of the talk has also helped deflate the shares, with ITV’s fall this year among the worst in the European media sector. There’s a recovery storyline housed within ITV to be sure, though the plot would need to take a surprising twist – no sign of that yet.

ITV’s technical chart makes clear that although Tuesday’s early sell off abated later in the session it was serious enough to push the shares lower than seen since the day after the Brexit vote on 24th June 2016. In fact, after an attempt to build on the inevitable rally failed late in April, shares have trended sharply lower. With the descending line that held the stock aloft since July having given way, impetus towards the next clearest support—Brexit day low of 137.8p gathers pace.

Another interesting motif is an unusually cogent head and shoulders pattern (‘H&S’ on the chart below). Left (‘L’) and right (‘R’) shoulders and head (‘H’) are marked. Traditionally, this a bearish construction with the potential decline measured as the length between the head and the trend line that connects shoulder lows. The pattern can’t necessarily be relied on to produce its theoretical effects. It can however enhance bearish sentiment. Either way, should the stock fail to close above the nearby low at the end of August—152.4p—the level will become a de facto resistance, trapping any buyers underneath and leaving them at the mercy of presumed magnetism from the Brexit vote low at 137.8p. Momentum is not on the buyers’ side—see ellipse marking decline on Relative Strength Index oscillator’s sub-chart. There’s room remaining before the current down swing will be exhausted. Confirmed extension towards the 137.8p support could well signify enough of a deterioration of sentiment to break that level. If so, momentum would almost mechanically increase, deepening the slide. A close above short-term supports very soon is crucial for buyers.

ITV Plc. share price chart (daily intervals)

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