Market Report: Ads downturn threatens 'overvalued' ITV

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The Independent Online

Shares in ITV closed down 5.51 per cent, or 1.75p, at 30p last night after a leading broker questioned its valuation relative to other broadcasters.

Merrill Lynch said that the pace of the decline in advertising revenue, which could be down 18 per cent in January for ITV1, offset any positives in support of the network's share price.

"Following our series of downgrades, the stock is at a significant premium versus our universe of media stock," Merrill said. "We don't see how this can be justified."

Further sharp falls in advertising "could leave profits so poor that a cut in programming becomes unavoidable", the broker added. Its assessment overshadowed the industry regulator Ofcom's proposals for broadcasters, which was seen as positive for ITV.

Merrill also sullied sentiment surrounding the regional newspaper publisher Johnston Press, which fell by 21.69 per cent, or 2.11p, to 7.62p after the broker lowered its target price from 19p to 13p.

Overall, the FTSE 100 was down 31.52 points at 4,059.88 while the FTSE 250 closed up 17.44 points at 6,159.5.

The banking sector remained the main talking point, with Barclays' share price falling for a seventh consecutive day. It lost 9.33 per cent, or 6.8p, to close at 66.1p. At one point, Barclays was down 25.6p at 47.3p amid concern that it might need fresh capital to bolster its balance sheet as the economic situation deteriorates and its bad debts increase.

Late rumours that the bank's Middle Eastern backers were in the market to raise their stake in a bid to prop up the share price failed to lift the stock off the bottom of the Footsie loser board. In the wider sector, Lloyds Banking Group just managed to stay afloat, up 0.3p at 45.1p, as investors remained cautious. One analyst warned that the FSA's recent announcement of a change in capital risk-weighted assets would "give the markets a false impression of strengthened capital adequacy rations while also removing visibility in the calculation of those ratios".

Sandy Chen, a banking analyst at Panmure Gordon, said the move might prove "counterproductive", adding: "The bald truth is that neither the Government guarantee and insurance programmes, nor the loosened capital adequacy standards, will stop the rise in bankruptcies and unemployment that are dragging the economy further into recession, nor were they designed to do so. They will simply hide the true extent of the potential losses and capital strains that banks are facing." On the upside, Royal Bank of Scotland gained 2.2p to close at 12.5p. Although it was a surge of 21.36 per cent, RBS shares were worth more than 50p only two weeks ago.

Analysts at Goldman Sachs pointed out that, although RBS had raised £32bn of common equity, its tangible book value per share had decreased by 60 per cent and its share count had increased by a factor of five over the past year, the stock was unlikely to recover from its current depressed valuation "until investors get visibility on possible future dilutive capital increases and/a full nationalisation".

Elsewhere, the mining group Kazakhmys rose by 4 per cent, or 7.95p, to 206.75p after UBS moved the stock from "sell" to "neutral". Positive broker sentiment also lifted Anglo-American, which was 9p higher at 1315p after Goldman raised its target price from 1421p to 1485p. Property groups rebounded despite another warning on capital requirements.

JP Morgan said its analysis of the UK's commercial investment market suggested a capital shortage of "at least £50bn", adding: "On a conservative estimate, the stocks need at least £625m to avoid covenant breach. Hammerson and Liberty International need to take action most urgently, likely in the first quarter of 2009.

"But £4.2bn would be needed to bring loan-to-value into a comfort zone of 50 per cent. In this scenario, Liberty International would need to issue new equity equal to 77 per cent of [its] market capitalisation."

The assessment followed a warning from Credit Suisse, which had undermined the sector on Tuesday. As a result, bargain-hunters lifted the stocks and Hammerson closed up 13.25p at 423.25p, while Liberty remained firm at 428.5p, up 3.5p.

On the second tier, the transport group National Express, which was rumoured earlier this week to be the focus of a possible break-up bid by shareholder Jorge Cosmen, fell back 5.05 per cent, or 20.25p, to 381p after Citigroup moved the stock from "buy" to "hold" in a review of the sector. "Volume and yield growth has been exceptional in recent years but some franchises, particularly those recently let, look vulnerable to a severe UK downturn due to adverse movements in contractual subsidy," the broker said.

Among smaller companies, Midas Capital's shares halved in value, from 34p to 17p, after the company said it was in talks with lenders about a temporary waiver of its covenants until the end of April as it seeks to restructure its borrowing arrangements.