BLUE CHIP: City switches off Carlton

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The shine has definitely come off Carlton, the former glamour stock of the TV sector. Recent final figures fell below the level the market had anticipated, mainly because of problems in the video production division and some currency exposure.

Shares in Carlton, however, have been on a losing streak for a while, having underperformed the FT-SE 100 by 36 per cent over the last 12 months, and have fallen 8 per cent over the same period.

It is too soon to say that Carlton is out for the count, but the next few years look as if they will provide plenty of challenges. The most significant will come from the advent of digital television. Carlton's start-up losses from this could run at pounds 20m next year, peaking at around pounds 40m in 1999, before falling back to pounds 30m or so in 2000. That should have the unwelcome effect of dampening revenue growth to a meagre 7 per cent a year, from the present rate of 10 per cent. The problem as far as the market is concerned is confined almost entirely to the advent of digital television. Clearly the honeymoon period about what digital may bring is over.

Start-up costs for British Digital Broadcasting, which it owns with Granada, are expected to come to more than pounds 400m. Many analysts think the shares are undervalued, but the caution is probably justifiable. BDB is a big bite to get right. While revenues should flow in, the willingness of the British public to continue signing up for new services, as TV channels proliferate, must be in doubt.

There are plenty of problems overhanging the station. An EU inquiry into a deal Carlton has with BSkyB to supply programming content is under scrutiny on competition grounds. Retuning TV sets could cost pounds 20m, while there are no firm orders for the set top boxes that will control how consumers receive the new stations. Yet some argue that BDB is worth 40p a share and more on the Carlton share price.

Elsewhere, a declining audience for ITV stations in general will hurt advertising revenue for Carlton's three licences. For that reason, the company should have a stake in the new service, if only to protect itself against any further losses of advertising share. The company also continues to suffer from an image problem in broadcasting circles.

Trading at a discount of 20 per cent to the sector, the shares have little to expect in the immediate future. Michael Green, the company's founder, has traditionally taken a cautious approach to gearing, so there will be little hope of a beneficial boost to earnings from that quarter. The shares are best avoided for the time being.

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