Gamble of the week: A battered broadcaster

Back in September, we thought the market was being too hard on ITV (LSE: ITV). Its shares are up nearly 50% since then. We’re now wondering whether STV has been similarly overlooked.

STV holds the Channel 3 licence for central and northern Scotland until 2014. Last November, the government decided to grant it an extension for another ten years until 2024.

The company faces similar challenges to ITV, but is dealing with them well. While it is largely reliant on ITV for programming content, it is getting a bigger share of viewers in Scotland. Its highly regarded news programmes are a big factor here. With 4.2 million regular viewers a month, it is still attractive to advertisers. Like ITV, it is trying to grow its non-advertising income.

STV Group (Aim: STVG)

STV share price

Digital revenues are rising nicely as services such as the catch-up TV service, STV Player, gain traction. STV also makes its own TV shows and is well known for programmes such as Taggart and Antiques Road Trip – a new series has just been bought by the BBC. It’s also been awarded local TV licences for Glasgow and Edinburgh.

STV reckons it is on track for non-broadcast earnings to be a third of total profits by 2015. With costs being cut and debt coming down, some profit stability and maybe even growth can be expected.

So are STV shares too cheap? They trade on five times this year’s expected earnings. At 144p per share, STV has a market value of £56m. Add net debt of £45m and a pension fund deficit of £18m, and the whole business can be bought for £119m. A buyer would get back £17m of operating profit – a pre-tax return of 14.3%.

Could that tempt ITV to buy STV? A sharp fall in TV advertising revenue would hurt STV, but nonetheless the shares may be worth a gamble.

Verdict: buy at 144p