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STV diversifies away from advertising as revenues increase 21%

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STV LON:STVG, the Scottish free-to-air television channel published its interim results for the six months to the end of June 2023 today (5th September). Despite weak trading conditions STV managed to increase revenue year-on-year by 21% to GBP75.3m.

However, as companies cut their cloth according to the anaemic health of the economy, one of the first snips was advertising. This has been reflected in a fall in Total Advertising Revenue (TAR) by 14% year-on-year to GBP45.8m.

STV remained in profit, with adjusted operating profit of GBP8m, but this was down a third year-on-year. But when exceptional items including the GBP2.8m cost to arrange a new agreement with ITV LON:ITV to access its digital content and Video-on-Demand, high-end TV costs, and IAS 19 pensions and employee benefit costs were taken into account, operating profit was zero, with total profit for the period being GBP3.3m, down 61% from the GBP total profit seen a year ago. One thing that was up was debt, which ballooned 147% to GBP16.3m year-on-year.

The company used its debt facilities to partially pay for an acquisition in July, and the company hopes to start reducing net debt by the year’s end with the target of 1x leverage (net debt to EBITDA), which is at the bottom end of the 1x to 1.5x leverage target. STV exercised its accordion facility, increasing debt headroom to GBP70m in order to provide additional liquidity if needed.

STV momentum slowing 

This time last year, it was a very different, after a good summer, tournament football and signing new production deals, following a record-breaking year in 2021, it seemed STV was gathering momentum. Then the economy, inflation and rising interest rates then reared its ugly head in the second half of 2022 and rolling into 2023 and that momentum dissipated.

That said, Scots do watch a lot of TV compared to the British average, and it seems their default setting on the TV remote is STV, which in the country was the most popular peak time channel for the sixth year running – boasting 22.5% of peak-time Scottish eyeballs. STV managed to extend its lead over the free-to-air BBC for the sixth half-year running to its highest point in 15 years.

The Glasgow-based broadcaster also was the dominant force in Scotland amongst commercial channels, delivering 97% of the top-500 audiences, which included the global streamers, Netflix and Disney.

The decline of advertising has been whistling in the wind for a long time, and STV has taken the strategic decision to diversify its sources of revenue. The TV channel expects a pick-up in advertising later in the year, driven by major sporting events like the Rugby Union World Cup, but is putting its efforts into increasing the revenues it gains from studio production and outside broadcasting. The company expects over 60% of 2023 earnings to come from outside broadcasting, comfortably exceeding 50% diversification target.

Investment in studios

STV has also invested heavily in building up its production capacity. The FTSE250 company acquired Greenbird Media for GBP32m in July (partially paid for by GBP21m existing arranged banking facilities – explaining the spike in net debt year-to-year), with analyst citing it as a “Transformational Deal”.

Simon Pitts, STV’s CEO said: “The transformative acquisition of Greenbird Media represents a major step towards our goal of STV Studios becoming the UK’s #1 nation[al] and region[al] production company and adds significant scale and creative firepower to the group, illustrated by the recently announced major reality format The Fortune Hotel which will debut on ITV in 2024, produced by Tuesday’s Child.”

Greenbird was one of the largest independent networks of producers in the UK, with 2,000 hours of archived content and another 350 hours in production for 2023. Focussing on mainly prime-time entertainment shows such as Mortimer & Whitehouse: Gone Fishing and Queens for the Night, the acquisition should immediately contribute to STV’s earnings from outside linear broadcasting, help build the channel’s library (accessible on STV Player) and expand STV’s international footprint.

Positive Greenbird acquisition

Roddy Davidson, head of research for Shore Capital, which has STV as a house stock said there was much to like in the Greenbird acquisition.  He said: “We are positive on this transaction from a strategic and financial perspective as it turbo-charges the scale and growth of an already successful part of group. The fact that STV Studios will have a much broader base of businesses and resultant reduction in group level exposure to cyclical advertising revenues is also a big plus from a quality of earnings perspective.”

The production side of the earnings balance is where the meat in the sandwich lies. STV reported a 294% increase in studios revenue to GBP27.2m, built on the back of the delivery of more drama shows, which should continue to improve in the second half of the year.

Digital services are also seen as another potentially important revenue stream, with STV reporting digital revenue rising by 9% to GBP10.1m. Within that Video-on-Demand (VOD) revenues were up 14% and as a business unit adjusted operating profit was up year-on-year to GBP5m.


Digital content acquisition strategy

STV has continued apace with its digital content acquisition strategy, ensuring visitors to STV Player, across the whole of the UK, have access to a wide range of high-quality content from around the world.  Acquired titles included Irish crime thriller, Redemption and Australian police procedural, Rush. One key acquisition for 1H23 was iconic soap, Brookside, which achieved one million streams in its first week and significantly raised the profile of STV Player across the UK. Brookside became STV’s top performing VOD programme in 2023, with eight million streams in 1H23 of which 65% came from outside Scotland.

Pitts said: “Studios revenues almost quadrupled and VOD revenues on the STV Player grew by 14% as we continue to execute our strategic plan and reduce our reliance on traditional broadcasting. We now expect over 60% of our total 2023 earnings to come from these new growth areas, well ahead of our 50% diversification target.”

STV’s shares opened trading today at 195.8p. STV has offered a one-year return of -29.3% and year-to-date return of -27.5% with prices ranging from 190p to 315p over a 52-week period, giving the company a market capitalisation of GBP90.6m.

Bridgewise, the artificial intelligence stock analysis platform rated STV as a ‘Hold’, whilst Shore Capital still see STV as “significantly undervalued”. Davidson said: “Based on our revised forecasts, STV’s stock is trading on FY FY24F P/E, EV/EBITDA and DY ratios of 5.8x, 4.3x and 5.8%, respectively following a period of share price weakness (-37% over six months / -16% since the Greenbird deal). We believe that the latter has factored in an earnings collapse of a quantum that is not supported by industry forecasts, evidence from advertising-sensitive companies and, most importantly, the performance, outlook and reduced estimates summarised above.”

He continued: “Significantly, it has also created an unfavourable delta of over 20% vs. ITV’s share price over the last three months – despite the latter flagging a relatively cautious 2H23 outlook at the time of its interims and withdrawing from talks to boost its production business by acquiring All3Media.”

STV proposed an interim dividend of 3.9p/share, in line with 2022.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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