ITV has moved higher as Credit Suisse said it could return cash to shareholders, and highlighted than any potential bidder for the broadcaster would have to pay more than 346p a share.
The bank put an outperform rating on ITV with a target price of 270p, helping push its shares 1.4p higher to 205.8p, one of the top risers in a falling market. Analyst Omar Sheikh said:
The recent pull-back, on global growth concerns, provides an attractive entry point for investors looking for exposure to one of the rare, growing, TV content assets in Europe. We add the stock to our Europe Focus List and Global Focus list, highlighting (i) the strategic value of ITV Studios; (ii) the strong current earnings momentum coupled with capacity for capital returns; (iii) the scope for upside from regulatory change (retransmission fees); and (iv) undemanding entry multiples.
[There is] substantial scope for further capital returns: ITV should generate more than £400m in free cash flow this year, and more than £600m in 2015. This will give it the capacity to return a significant amount of capital to shareholders in 2015. We calculate it would be logical to expect £280m-£360m (7p-9.1p per share), versus £156m-£160m (4p per share) in the last two years.
Our 270p base case valuation assumes 6% ad growth in 2014 and 3.1% in 2015. If we were to assume 7% in 2014 and 10% in 2015, our core value would rise to 308p.
If a retransmission consent regime were to be introduced in the UK, we calculate the net present value of the incremental free cash flow ITV would generate is 38p. Any third party seeking to control ITV would need to pay a premium over this 346p combined value, in our view.
ITV trades on undemanding multiples, 9.8 times 2015 estimated enterpriser value/EBITDA, 13.9 times PE. If we were to strip out ITV Studios at a strategic premium multiple of 17 times 2015 enterprise value/EBITDA [£3.2bn], and ITV online at zero, ITV Broadcasting is currently trading on just 8.6 times 2015 enterprise value/EBITDA.
