Strategic progress in tough ad markets

STV’s H1 results confirm a picture of continuing uncertainty in the UK economy and advertising markets (albeit Q3 should be positive due to sporting events), driving a reduction of 8%-9% to FY EPS estimates. As market leader though, STV is very well placed to benefit when the ad market recovers, with every 1% of advertising uplift having a material positive impact on EPS. STV also continues to make vigorous progress in its diversification strategy. Growth in both Digital and Studios businesses (forecasts unchanged, now 69% of profits) should also drive future growth for the group.

Strategic progress in tough ad markets

STV is broadly doubling the size of its Studios division with the acquisition of production business Greenbird Media for c.£24m. Strategically this looks transformative for STV Studios, and further diversifies the group outside of Broadcast. We conservatively estimate 5% EPS accretion, and financial ratios remain very comfortable even with the higher debt.

Transformative acquisition for STV Studios

Several recent announcements highlight that STV is continuing to execute its diversification strategy effectively, even in a tough economy. We summarise the developments in this report, consider further possible newsflow to come from STV and recap the investment case. At 249p, current valuation is 7.3x EPS / 4.5% dividend yield (FY23E).

Continuing operational momentum

STV Group’s FY22 results and FY23E outlook, announced this morning, are in line with expectations. The resilient performance through the economic downturn (adjusted PBT +2% in FY22 and we forecast -10% for FY23E) underlines improving earnings quality from STV as the group continues its diversification from broadcast to streaming and studios, which together should generate over half of group profits for the first time in FY23E. We forecast good aggregate growth prospects for the broadening portfolio, at an undemanding valuation (8.9x ‘bottom of the cycle’ FY23E EPS with a 3.7% dividend yield).

Resilience from diversification

STV continues to be viewed as a mature broadcaster, yet it is transforming into a growing streaming and production business. We see continued double-digit growth prospects in these areas, together with a resilient broadcast business, and calculate five-year growth of 7% pa in revenue / 10% pa in operating profit for the group (FY23E-FY28E). Near-term economic pressures are factored into current EPS estimates, but should also drive eyeballs towards STV’s free AVOD service. Current valuation (7.6x FY23E EPS / 4.3% dividend yield) looks modest given the longer-term potential.

Towards streaming and content