Market Report: Potential upside lures punters into ITV

Author: By Nikhil Kumar

UBS said while the market was discounting regulatory benefits and the likely upswing in revenues as a recovery takes root ? in other words, while the stock appeared fairly valued on the basis of the broadcaster’s current business model ? investors stood to benefit from a possible “strategic upside” owing to the fact that, unlike its peers, ITV “has the opportunity to create significant value” through the adoption of a subscription model.

“This would allow ITV to tap into new, faster-growing and more stable revenue streams from wholesale subscription revenues,” the broker said. “Furthermore, we believe ITV can extract a convergence premium for its channels and content given their ability to drive higher triple play revenues and the acceptance of pay TV as the ‘norm’.”

The company is unlikely to make such a radical change soon ? UBS reckons the group is likely to wait until a new chief executive is installed and completes his or her strategic review ? but, the broker points out, there is likely to be “growing anticipation of what a new management team can do to maximise the value of its audiences”.

“On this basis, we have increased our probability of a pay TV scenario from 25 per cent to 30 per cent,” the broker said, moving ITV’s shares, which climbed to 34.25p, up 2.25p, to “buy”, with a new target price of 37p, compared with 34p previously.

Overall, the prospect of consolidation activity in the insurance sector, and a strong start on Wall Street, where leading indices gained ground on hopes of a strong update from Goldman Sachs, the American investment bank which is due to publish a second-quarter earnings report today, lifted sentiment across the London market, driving the benchmark FTSE 100 index to 4202.13, up 1.8 per cent or 74.96 points, and the mid-cap FTSE 250 index to 7278.8, up 1.3 per cent or 94.37 points.

Friends Provident was the strongest of the blue chips, swelling in value to 68p, up 12.6 per cent or 7.6p, after rejecting a takeover proposal from Resolution, the financial services tycoon Clive Cowdery’s investment vehicle. Peter Eliot, analyst at Man Securities, said the approach and the subsequent rejection was no surprise, but suggested that “it should be possible to find common ground”.

“There is a large overlap in the shareholder base and we believe it should be safe to assume that most of the major investors are on board with the proposal,” he added. “Friends will be aware of this, and with Resolution likely to want to retain most of the existing top management, we believe there will be pressure on Friends to eventually recommend a revised offer.”

Consolidation hopes also powered the wider insurance sector, with Legal & General vaulting to 54.23p, up 8.7 per cent or 4.33p, Aviva rising to 297.25p, up 7.4 per cent or 20.5p, and Standard Life climbing to 182.4p, up 5.4 per cent or 9.4p.

Elsewhere, in the banking sector, Royal Bank of Scotland, up 1.5 per cent or 0.54p at 36.2p, and Lloyds, up 1.9 per cent or 1.21p at 64.51p, firmed up after UKFI, the body responsible for managing the Government’s holding in the two lenders, indicated that the sale of taxpayer-backed stakes was likely to take some time, saying that it “does not set any fixed timetable for disposing of the shares”.

Invensys was also strong, climbing to 223.75p, up 4.4 per cent or 9.5p, after UBS moved its rating to “buy” from “neutral”, saying the stock, which has weakened since the group’s results in May, offered good value at current levels.

“While we expect weak second-quarter reports from UK capital goods companies in July/August due to the contraction in industrial-end markets, we think that Invensys has scope to outperform during this period given its balanced earnings profile,” the broker added.

Over on the FTSE 250, Venture Production was 5.5 per cent or 43.5p heavier at 828.5p after rejecting a bid from British Gas-owner Centrica, which closed at 224.25p, up 2.8 per cent or 6p. Centrica, which said it had upped its stake in Venture to 29.9 per cent, offered 845p per share, a figure that Venture said undervalued its business.

Also on the upside, the commercial property landlord Segro was 6.5 per cent or 1.5p ahead at 24.5p after HSBC weighed in, switching its stance on the stock to “overweight”, and saying that the group’s planned acquisition of Brixton, up 3.8 per cent or 1.5p at 41p, was “set to be significantly earnings per share-enhancing”.

On the downside, UBS undermined sentiment around IMI, the engineering group, which declined to 282.75p, down 2.4 per cent or 7p, after the broker moved the stock to “neutral” from “buy”. “We think consensus has under-estimated the weakness of second-quarter trading for many of the UK engineers, including IMI,” the broker said. “In the past few weeks Charter, Bodycote and Sandvik have delivered profit warnings, and scepticism [regarding] the green shoots of recovery has grown.”

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