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STV gaining momentum on strong set of 1H22 results

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STV LON:STVG, the Scottish free-to-air television channel published its interim results for the six months ended 30th June 2022 on Tuesday (6th September). The channel reported revenue of GBP62.1m, up 3% from GBP60.3m the year previously.

Of this, total advertising revenue was GBP53.2m, a 4% year-on-year increase. This translated into operating profit of GBP11.9m, up significantly by 22% from GBP9.7m the year previously, and a 25% year-on-year increase in profit before tax. The company reported net debt on its books of GBP6.6m a 63% improvement since 2021 where net debt was GBP17.6m.

The shares closed trading on Tuesday at 287.5p, offering a one-year return of -15.45% and year-to-date return of -17.4% with prices ranging from 246p to 385p over a 52-week period, giving the company a market capitalisation of GBP129.4m.

STV breaking records

The channel improved across almost all vectors after a previously record-breaking year in 2021, and bucking the trend seen in other markets, where consumers were seeping out to global streaming channels like Netflix or Disney, STV was the most watched peak time TV channel in Scotland with a viewer share of 22.2%. The Scottish television channel was number one most watched in Scotland for the fourth year running, being preferred to BBC, ITV, Channel 4, Channel 5 and all of the international streamers.

In fact, Simon Pitts, STV’s chief executive said that STV enjoyed a peak time audience higher than the next nine commercial channels combined.

Roddy Davidson, a research analyst at Shore Capital, who has STV under coverage said: “STV’s interim results show an impressive performance despite tough comps and economic uncertainty and provide clear evidence of continuing success in executing its growth strategy. Notably there is also a cautiously positive assessment of prospects for the remainder of FY22.”

The [Scottish] Connection

Pitts said: “STV has a really strong connection with audiences in Scotland, across the country. We are very much embedded into local communities […] but we also have an international perspective.”

STV recently signed a significant contract with Apple TV to produce three seasons of a new drama, Criminal Record, starring Peter Capaldi, for the streamer. The studio is also producing content for the BBC, ITV, Channel 4 and the Discovery Channel, amongst others.

“There is no reason why a company headquartered in Scotland can’t produce high quality content for a global audience,” said Pitts, “this [television] is a momentum business, where you get positive traction from the shows you produce. We have momentum now, and intend to become the UK’s number one content provider.”

Pitts explained that because of the competition within television, big terrestrial and digital networks were in something of an arms race to provide the next global phenomenon. As a result, all the networks were looking to commission.

Levelling-up agenda

He explained that in some ways STV had benefitted from the levelling-up agenda, as many more shows were being produced outside of London and the South East of England. Also, STV had found that it had also inadvertently benefitted from the cost-of-living crisis, as two-thirds of Scots were cancelling subscriptions to pay-TV services as they were cutting back on household expenditure and were turning back to terrestrial and free-to-air services.

The company’s forecasts on the contribution its studios will make to the bottom line are quite punchy. “In 2020 we said that we were targeting GBP3m profit on GBP45 by 2023 [from our studios], and we’re nearly at that target now, ahead of schedule. We’re similarly optimistic about the next few years,” said Pitts.

According to recent research, Scots watched on average more television than other Brits, partially because of the poorer weather. This of course all has a positive effect of STV’s advertising revenues. Pitts said the Scottish advertising sector continues to show resilience and growth, driven by the return of larger advertising clients.

STV said that the balance across SME and government spend now back towards pre-Covid levels and in addition, STV Growth Fund attracted a further 43 new advertisers in 1H22. The STV Growth Fund is an initiative by the channel to encourage advertisers from the SME sector to access television advertising with STV match-funding smaller companies in order to give them a television advertising campaign. The fund has introduced more than 350 new Scottish advertisers since launch, with over 70% of 2022 advertisers rebooking from prior year.

“It’s good business development from our perspective,” said Pitts, “as as these companies grow we retain them as advertising clients and grow our revenues with them.”

Mad Men

However, advertising is also very sensitive to the general economic climate, and in a downturn, corporations are most likely to cut advertising spending before halting investment or cutting payroll. Pitts said: “The advertising market is clearly not going to be immune from the ongoing economic uncertainty, with total advertising up 4% in 1H22 and forecast to be slightly down for the nine months to September, but we are expecting a stronger 4Q22, boosted by the first ever winter football World Cup.”

Although Scotland did not qualify for the world football jamboree, STV will be airing 33 live matches. “Scots just love football, and will watch it fervently,” Pitts said, “although the Tartan Army didn’t qualify this time around, England did, and you can guarantee that Scottish football supporters will vehemently support anyone that plays against England,” he joked.

STV is looking towards the way that consumers will view content in the future and the STV Player has grown strongly over the last four years, with streams trebling since 2019. The company said 1H22 streams were down due to the 2021 lockdown & Euros, but said active users had increased. Digital video-on-demand advertising was up 16% in 1H22, with revenues increasing despite stream decline and Euros comparator as advertising demand recovers to pre-Covid levels. The company reported net ad impressions up 21% with the average revenue generated per brand also up significantly.

STV Player finding elbow room

However, competition in the sector is strong and STV Player is trying to find elbow room amongst other content providers like Apple, Netflix and Disney, but with a much smaller budget and global reach. Pitts said: “Look, we’re not trying to directly compete with the likes of Netflix, but that said curating UK-specific content – which is a strong selling point for STV – is something that sets us apart. The majority of TV watched in the UK is UK-focussed content, and some of the larger pay-monthly providers are starting to have financial issues. STV Player is free-to-air and funded by advertising, which also sets us apart.” VOD advertising experienced the most growth across all advertising sectors, with 16% growth year-on-year and 109% growth when compared to the same period in 2019.

Davidson said: “STV has substantial upside potential, and we’re leaving our forecasts unchanged. We’ll continue to monitor developments through 4Q22 and estimate three-year adjusted EPS and DPS growth of 21% and 41% respectively. STV has had a period of share weakness, but we believe the current stock valuation not only fails the capture STV’s growth potential and underlying strengths but is unfairly pricing in an unpronounced decline in performance and prospects.”

He continued: “Therefore, we predict substantial upside potential […] producing a fair value estimate of over 500p”

The board proposed an interim dividend of 3.9p, up 5% on 2021. Pitts said: “We’ve got a balanced outlook. After we invested back into the business for growth, and made sure we were adequately managing our own liabilities [to the pension scheme] we believe we approved a fair dividend..,as we want to always be a company that offer a sustainable return and growth for shareholders.”

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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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