What is ITV’s (ITV) counterpart north of the border getting right that its former parent is getting wrong?

Both are under relatively new management and Carolyn McCall at ITV and Simon Pitts at STV (STVG) arguably face the same challenges of a difficult consumer backdrop and political uncertainty with all the implications that has for advertising revenue.

Yet in the past 12 months shares in STV are up nearly 10% while ITV is down more than 17%.

STV IN A NUTSHELL

STV was formed through a combination of Grampian Television and Scottish Television in 2006 and now holds the Channel 3 (ITV) commercial television licence for Scotland.

From its base by the banks of the Clyde in Glasgow it creates and distributes programmes across all platforms including broadcast, catch-up TV, online, mobile and other connected devices.

Pitts, who replaced Rob Woodward in January 2018, is an alumni of ITV. In some respects, the strategy is not too dissimilar to his former employer.

STV is looking to diversify away from more volatile TV advertising revenue by investing in TV production and building up its digital footprint. Pitts tells Shares: ‘These days you don’t have a digital strategy, you just have a strategy.’

The company has one public key performance indicator, which is to achieve a third of total operating profit from non-broadcast activities by 2020. In 2018 the total was 24%, up from 19% in 2017.

A LOCAL HERO?

One element of the strategy which seems distinct from ITV is a more localised focus, particularly when it comes to advertising. The aim is to penetrate parts of the advertising market which historically would have gone to local newspapers or commercial radio.

This was part of the plan under Pitts’ predecessor Rob Woodward. He hit upon the idea of city-based channels in Scotland’s major cities, which were eventually subsumed into one channel STV2.

Unfortunately this failed to find an audience and was loss-making. Pitts closed the channel down shortly after taking over, with the advent of BBC Scotland – a rival launch from the public service broadcaster – perhaps a factor in the decision.

Pitts’ play for local advertising has been supported through the STV growth fund – starting with seed capital of £5m in May 2018, this was doubled in February 2019. The fund aims to help businesses, 130 of them so far, to advertise on TV, many for the first time.

This includes matched funding for TV ad campaigns, free advertising for start-ups and, for some consumer-facing businesses, even ads in return for revenue or equity sharing agreements.

Pitts makes clear the company has no interest in becoming a venture capital fund and acknowledges the motive isn’t pure altruism but instead lies in securing more advertisers for STV in the long term.

Looking at the recent trading update this appears to be paying off, with regional advertising up between 20% and 25%.

National advertising revenue was expected to be ahead of previous guidance, falling by between 1% and 2% compared with a 7% drop at ITV.

WORKING WITH THIRD PARTIES

STV benefits from a favourable deal with ITV, struck in 2012 after a long-running dispute between the two parties, which insulates STV from both declines in the national advertising market and increases in the ITV programme budget. This lasts until 2024.

Agreements secured with Virgin Media and Sky in the past 12 months means the STV Player is now available on all platforms across Scotland.

Pitts notes the company has added new programming to the STV Player to help it compete with the likes of Amazon and Netflix including shows like In the Night Garden and coverage of European football. He dismisses suggestions this move could dilute the STV brand.

SMOOTHING LUMPY PRODUCTION REVENUE

On the production side there was a recent breakthrough moment with its first big multi-part drama on BBC1 called The Victim.

The problem is, as ITV has found, production revenue tends to be unpredictable or lumpy. To address this situation STV has to get bigger.

That explains why it has made several high-profile new hires in its production business including drama executive Elaine Collins, who was behind successful shows like Vera and Shetland, and former BBC commissioning editor Craig Hunter who green-lit programmes like Blue Planet Live and Inside the Factory.

Shore Capital analyst Roddy Davidson lays out what he sees as the key qualities of the business as being: ‘(a) STV’s position as the dominant commercial broadcaster (and go-to solution for TV advertising in Scotland) and its consistent outperformance of the ITV network; (b) the strength and experience of its management team and; (c) the potential to drive digital and content revenues.’

At 375p and based on Davidson’s forecasts for 2019 STV’s shares trade on a price-to-earnings (PE) ratio of 8.1-times and yield 5.6%, with a recent agreement on its pension commitments helping to underpin the dividend.

BUYBACK PRESSURE

Perhaps this single-digit PE is why activist shareholder Crystal Amber (CRS:AIM), which owns nearly 18% of the company, is keen for management to pursue share buybacks. Pitts says in response there is a requirement to ‘balance the needs of all shareholders’.

And despite an apparent rebellion against his own pay award at the company’s recent investor meeting (23 Apr), with 30% voting against the remuneration report, Pitts says shareholders are ‘very supportive’.

The discounted valuation has also inevitably driven takeover speculation with ITV itself a mooted bidder, but Pitts is also firm in his belief the company has ‘a successful future as an independent business’.

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