STV reported revenue of £116.5m in FY15, down 3% y-o-y with EBIT of £20.3m, up 4% and adjusted PBT of £19.1m, up 10%. After £2.8m of capital expenditure, this converted to operating free cash flow of £17.5m (86% EBIT to cash conversion, vs 79% in FY14) and, after the £7.8m pension deficit financing and £3.4m dividend payments, this flowed to a £3.7m reduction in net debt to £25.7m (1.1x EBITDA). Reported PBT of £9.8m included £8.8m of exceptional charges of which £1.7m (management incentive plan) will have a cash impact in FY16 – the balance relates largely to the write down of goodwill in the production business (£5.1m), although this has been offset entirely by the recognition of a £5.1m deferred tax asset.
Exhibit 1: Summary results and forecasts
£m |
2014a |
2015a |
2015e |
Variance to forecasts |
y-o-y change |
2016e |
2017e |
National airtime sales |
77.8 |
78.6 |
80.1 |
(1.5) |
1% |
80.1 |
82.2 |
Regional airtime sales |
12.6 |
13.4 |
12.7 |
0.7 |
6% |
13.8 |
14.1 |
City TV sales |
0.6 |
1.0 |
1.5 |
(0.5) |
67% |
2.5 |
3.0 |
Sponsorship sales |
5.3 |
5.2 |
7.2 |
(2.0) |
-2% |
5.2 |
5.3 |
Digital sales |
5.3 |
6.6 |
5.4 |
1.2 |
25% |
8.3 |
10.3 |
Other sales |
5.5 |
3.5 |
4.3 |
(0.8) |
-37% |
2.8 |
2.5 |
Total consumer revenues |
107.1 |
108.2 |
111.3 |
(3.1) |
1% |
112.6 |
117.4 |
Productions |
13.3 |
8.3 |
9.0 |
(0.7) |
-38% |
15.0 |
18.0 |
Total revenue |
120.4 |
116.5 |
120.3 |
(3.8) |
-3% |
127.6 |
135.4 |
EBIT: consumer ex digital |
17.4 |
16.7 |
18.0 |
(1.3) |
-4% |
17.0 |
17.3 |
EBIT: digital |
1.7 |
3.2 |
2.5 |
0.7 |
87% |
4.1 |
5.2 |
EBIT: production |
0.4 |
0.4 |
0.0 |
0.4 |
0% |
0.9 |
1.3 |
EBIT |
19.5 |
20.3 |
20.5 |
(0.2) |
4% |
22.0 |
23.7 |
Margin: consumer ex digital |
17.1% |
16.5% |
17.0% |
-0.5% |
-0.6% |
16.2% |
16.1% |
Margin: digital |
32.0% |
48.0% |
46.3% |
1.7% |
16.0% |
50.0% |
50.0% |
Margin: production |
3.0% |
4.8% |
0.0% |
4.8% |
1.8% |
6.0% |
7.0% |
Overall margin |
16.2% |
17.4% |
17.0% |
0.4% |
1.2% |
17.2% |
17.5% |
Net interest |
(2.2) |
(1.2) |
(1.4) |
0.2 |
|
(1.2) |
(0.9) |
PBT (normalised) |
17.3 |
19.1 |
19.1 |
0.0 |
10% |
20.8 |
22.8 |
Source: STV Group and Edison Investment Research
2015 results highlights – production drag but strong digital margins
The 3% decline in revenues (against our forecast of a 1% decline) was primarily a function of a weak performance by the production business (down 38%), with the higher margin consumer division (comprising broadcast and digital) up 1%. Despite the revenue shortfall, EBIT was broadly in line with forecasts at £20.3m (forecast £20.5m), helped by a large step up in margins from the digital services (48% vs 32% last year).
Broadcast: Against a fairly difficult basis of comparison (2014 included the FIFA World Cup), national advertising increased by 1%, whereas regional increased 6%. A full-year contribution from the city TV services in Glasgow and Edinburgh led to a 67% increase in city TV revenues that, although small (£1m in FY15), is progressing towards breakeven, expected in 2017.
Digital: Revenues increased 25%, behind our forecast of 35%, owing to a reduction in transactional revenues (bingo), whereas use of STV Player continues to grow strongly (revenues up 33%), with increased levels of both use and engagement (average time spent per day up 16%). The shift in the mix in digital revenues towards the higher-margin STV Player was the driver of the significant step up in margins.
Production: 2015 was another difficult year for STV production, with some key commissions slipping into 2016 (which has consequently started very strongly). The 5% EBIT margin, while behind last year, was still higher than we had forecast (we had assumed no contribution).
Outlook – FY16 a better year for production
We are making no significant changes to our EBIT and PBT estimates. Although we trimmed our revenue forecasts for FY16 and FY17 by c 3%, we still expect a return to overall revenue growth in 2016 with both consumer and production contributing, with broadly flat EBITA margins. The impact of a falling interest cost in line with our forecast for decreasing net debt adds leverage at the EPS level, which we expect to increase by 8% in FY16.
Consumer (non-digital): In Q116, management expects national airtime to be down 2%, slightly below the TV market. On the other hand, it expects regional to be up c 32%. Quarterly variations are largely explained by one-off events (for instance, last year’s regional advertising was weak in Q1, and national was relatively strong as STV benefited from shifting advertising budgets away from Channel Five due to a disagreement over pricing). This year ITV’s coverage of the European Championships is likely to move the dial in Q216, and Q3 may be weak given ITV’s coverage of the Rugby World Cup last year, but we continue to expect annual advertising growth of 2-3%.
Consumer (digital): In Q116, management has pointed to revenues up 25% for digital, broadly as we forecast for the year. For the year as a whole, we forecast ongoing strong uptake of STV Player and online services, which have struggled to gain traction so far but should benefit from the re-launch of a more comprehensive online news service, planned for mid-March. STV aims to leverage its already strong broadcast news brand online, providing comprehensive international and regional news coverage in Scotland, complementing its editorial with short-form, targeted-for-mobile video. The traction that STV has had with STV Player has also helped build a deep pool of data on one in three adults in its regions, and it has worked with c 40 advertisers to provide geo-targeted campaigns. This has not yet had a meaningful impact on digital revenues, but offers another potential route to enhance its digital revenues as it continues to expand the bank of data.
Production: The sharp reduction in 2015 revenues is partly a function of commission timing (for example, Catchphrase has been recommissioned but falls into H116 rather than H215 as previously expected), but also owing to STV’s struggle to find significant new breaking formats. With the recruitment of Sarah Brown in 2014 (ex BBC drama), Dan Korn in 2015 (ex Discovery) and the announcement of a strategic partnership with Group M last year, it has meaningfully stepped up development activity. STV is already developing a strong reputation in documentaries and in drama, where the lead time from development to commercialisation is longer at around two years, we expect initial successes later this year. With the recommissioning of STV’s staples (Catchphrase, Antique Roadshow, the Link) and now Safeword (launched on ITV2 last year), and a strong pipeline announced, particularly in factual, we expect a considerably stronger 2016 – bookings so far have already matched those for the whole of FY15.
