Just over a year ago I tipped shares in this Scottish television company at 144p. I thought they were very cheap, trading on just five times expected earnings. The shares have since appreciated by 139% to 344p.
2013 was a good year for the company, with pre-tax profits growing by 16%, debt continuing to fall and the pension fund deficit disappearing.
Like for its larger peer ITV, advertising provides the bulk of its income, but its other businesses are growing nicely. The company’s own programmes are doing well, with sales growing by 32%, while digital revenues grew by 23%.
The company, STV (LSE: STVG), says that its non-broadcasting revenues are on track to be one third of the total by 2015. This would make the business a lot less risky than it is now, given how volatile advertising revenue can be.
Analysts think that earnings per share will keep growing by more than 10% for the next two years. This puts the shares on a price-to-earnings (p/e) ratio of 8.9 times for 2014, falling to 8.2 times in 2015. This looks too cheap.
Last year, I wondered whether ITV or someone else might buy STV, as they would get a good return on their investment. That still looks to be the case. At 344p, the business can be bought for £170m, including debt.
Based on last year’s trading profits of £18m, that equates to a pre-tax return of 10.6% before any profits growth or cost savings are considered.
Verdict: STV shares are still a buy