Media gets through its toughest trial yet

Kathleen Brooks
THE X Factor winner for 2010 is… ITV. The broadcaster has managed to survive the economic crisis, albeit with a slimmed down staff base, and actually managed to turn a £25m profit at the end of last year, after losing £2.7bn in 2008.

There could be more good news to come for the UK’s media sector since the advertising environment has stabilised in the past year. Last week, ITV announced that it expects advertising to increase by 7 per cent this year.

Since the broadcaster derives 70 per cent of its revenues from advertising, this should fuel appreciation of its share price as extra revenues filter down to its bottom line.

There are signs that the market is starting to wake up to the changing fortunes for the media sector. According to asset management firm BlackRock, investors in European exchange-traded funds piled more of their money into the media sector – £23m – at the end of February than they did in any other sector.

If this is the start of a trend then now could be a good time to go long media stocks. ITV’s stock price recovered strongly from the lows of 20p reached at the peak of the financial crisis. However, the stock remains well below its long-term peak of nearly 150p, and is currently languishing two thirds below that level at 50p.

Spread betters should differentiate between firms, says Sam Hart, analyst at Charles Stanley, the stockbroker. Cyclical companies are expected to outperform their defensive peers as the economy emerges from recession. This bodes well for ITV and regional newspaper groups that have high exposure to advertising. However, it’s less encouraging for companies that managed to sustain performance throughout the recession, such as niche content producers.

ITV’s heady mix of popular prime-time shows and its sports rights are also having a positive impact for the broadcaster’s financial performance.

England’s progression to the World Cup finals in South Africa in June was also a positive result for the broadcaster. The tournament is expected to lift advertising revenue for ITV, as viewers tune in to catch the matches.

Some of its most popular shows have also been hits overseas, including the X-Factor and I’m A Celebrity... Get Me Out of Here. ITV sold these shows to the US, India and Sweden last year, boosting revenues from overseas productions by 40 per cent. Global exports of ITV shows this year should continue to have a favourable effect on its balance sheet due to a weak pound.

But satellite broadcaster BSkyB might have a tougher 2010, says Hart. It had a fairly smooth ride throughout the recession. Since it makes about four fifths of its revenue from subscriptions, it was not exposed to the downturn in the advertising market. However, regulatory risks are on the horizon.

Media regulator Ofcom is undergoing a review of paid-for TV. “Most people think the outcome of the review will mean that Sky will be forced to sell its premium content – including sport and films – at wholesale prices to its competitors, including Virgin Media,” says Hart. Ofcom has not yet concluded its review, but this remains a real threat to BSkyB since it will enhance the attractiveness of its competitors.

The media still has to address the structural issues it faces, such as how to sustain revenues during the online revolution. But, in the near to medium term, if you pick the right companies, there are profits to be made.