Goldman downgrades ITV to neutral

Goldman Sachs marked down its valuation of ITV’s shares as a result of the recent de-rating in its US peers and cut the M&A premium it attached to them, although it still saw the company as a potential takeover target.

Interestingly, the broker lowered its 12-month target price on the stock from 329p to 297p, in part as it lowered the M&A premium on the stock’s valuation from 50% to 30%, with the rest of the shares’ value, 70%, now being a function of the company’s fundamentals.

The latter also came down as a result of the de-rating of ITV’s US peers and was set at 14.5 times’ the estimated 2017 P/E, down from 15 times.

“We see more limited NT upside given the lack of major positive earnings momentum and the de-rating of US peers,” Goldman said.

The broker also downgraded the stock to ‘neutral’ and removed it from its Pan-Europe Buy list.

Nonetheless, at a price-to-earnings multiple for 2016 of 12.8 the shares were not “expensive”, the analysts said.

Furthermore, the trend towards a rising value of content and convergence between telcos and media made the company a potential M&A target, Goldman said.

Weak prospects for advertising and poor ratings were also set to weigh on programming costs at ITV, Goldman Sachs said in a research note sent to clients.

The latter had seen ITV’s audience decline by 4%-5% in 2014/15, while the end of major shows – such as Downton Abbey or Mr.Selfridge - and a change in the Director of Television might result in greater programming reinvestment in the near-term, the broker said.

Nonetheless, the shares were up by 432% since being added to Goldman’s Buy list on 12 October 2009, versus an advance of 9.8% for the FTSE World Europe benchmark, analysts Lisa Yang, Otilia Bologan, Sarah Watson and Katherine Tait said in a research note sent to clients.

Goldman was in-line with the company consensus, anticipating 2015 NAR growth of 5.6%, programming costs of £1040m and earnings per share of 16.1p.

However, the broker saw upside to forecasts for ordinary dividends of 5.9p plus an extraordinary pay-out of 7.8p.

For the first quarter of 2015, Goldman anticipated NAR would grow by 1% and for all of 2016 by 3%. The latter was down from a previous projection for a rate of growth of 4.5% and below the consensus estimate for 3.8%.

Programming costs in the first three months of the year were pegged at £1057m.

Earnings per share were now seen reaching 17.8p, 5% less than previously (consensus: 18p).

ITV was also “structurally well-positioned” and had “strong” management, the analysts wrote.

As of 14:28GMT stock in ITV was up by 0.48% to 249.80p.