Broker snap: ITV's transformation on track, Nomura upgrades

14th Aug 2012 10:12

Nomura decided to upgrade its rating for terrestrial broadcaster ITV last night from 'neutral' to 'buy', saying that the current share price does not reflect the group's future potential."ITV's recent 1H 12 results marked the halfway stage of management's five-year transformational plan to streamline the business and diversify away from advertising," the broker said.ITV made £11m of cost savings in the first half and Nomura reckons that management can extract further cost savings from across the business in the future (£20m of estimated savings next year). Meanwhile, the broker has raised its 2013 forecast for Studios revenue growth from 8% to 12% after the first-half beat.Nomura's new base-case earnings per share (EPS) estimate for 2013 (9.65p, up from 9.11p previously) assumes further cost savings and Studios growth, which leaves it 8% above consensus.The target price for the stock was raised from 105p to 115p."However, we see ITV providing further optionality on future upgrades through a possible share buy-back, pay-TV growth, online and the longer-term possibility of contract rights renewal (CRR) relaxation. Our bull case would see a 14% upgrade to 2013 EPS against our new base case (or 23% vs consensus), and our bear case, which assumes -4% 2013 net add revenue (NAR), still suggests 1% 2013 EPS growth vs 2012."ITV is currently trading at just 8.3 times next year's earnings, a 10% discount to peers. The broker said: "At such lowly valuations, we believe the share price does not reflect the significant improvements in ITV's underlying business or potential optionality (most notably a £250m share buy-back that could boost 2013 EPS by 8%)."By 10:44, shares were up 1.31% at 84.14p.BC