STV Group Leveraging Scottish Content

STV Group (STVG.L) taps into two key trends: an advertising market increasingly focused on television and digital, and a strong local identity that connects with communities and differentiates it from national brands. With the 2014 referendum looming, interest in Scottish affairs will be high. STV’s Channel 3 licences should be formally renewed this autumn, digital and production revenues are growing and debt (a historic concern) is falling rapidly. Management’s confidence is reflected by an intention to resume dividends. On a 2013e P/E of only 4.5x, there looks to be plenty of upside.


Focused television and content pure-play
With digital and social media channels proliferating, STV offers an alternative for advertisers: a very strong Scottish brand offering both mass audiences and highly targeted local communities. With a turnaround period now well behind it, its Channel 3 (ITV) franchise offers a very stable source of profit and cash, and Productions is growing its content library. Digital profits are targeted to grow from £1.7m in 2012 to £5m by 2015, with margins rising as content is exploited across more platforms, including the STV Player and STV websites. Whether the Scottish referendum produces a ‘yes’ or ‘no’, the Scottish government has confirmed that it will uphold STV’s Channel 3 licences.

Strong cash flows – balance sheet worries in the past
STV’s balance sheet and pension deficit have been a historic issue, but with debt down by £11m to £45m in 2012 (2.3x EBITDA) and expected to decline to £20m by 2015 (despite likely higher pension costs), this should no longer be a concern. We expect earnings to increase by 7.1% in 2013 and almost 10% in 2014, helped by a growing contribution from digital and a declining interest charge.

Valuation: Yet to catch up
STV’s low rating reflects a historic legacy of over-diversification and high debt, as well as litigation with ITV. However, this is all in the past and the market has yet to catch up with its much improved balance sheet and strong cash generation. Although interim profits may be slightly lower, confirmation of an intention to resume dividends should be a positive catalyst and the formal renewal of the Channel 3 licence this autumn will be an important milestone. As digital profits come through, the value of STV’s local Scottish focus will become more apparent. Both a peer group comparison and a DCF support a share price of around 240p.

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