Market Report: ITV slides amid warning on ad-funded model

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The Independent Online

Traders switched out of ITV last night following a warning about the limitations of the broadcaster's advertising-funded business model.

ITV's interim results are due next month and, alongside the update, the company is expected to bring the market up to speed on the strategic review launched earlier this year. Analysts at Bank of America Merrill Lynch said the focus of the study was "likely to reach many of the same conclusions as those of the past", with the results focusing on higher investment in and better execution of the existing free-to-air (FTA) broadcasting business model. And though initially this approach may be welcomed by investors, the broker argued that there was a "need for more radical change".

"While cultural change and better execution would clearly be welcome, it will not address the structural limitations of ITV's FTA model – essentially that advertising alone is no longer enough to maximise the value of ITV's audiences," Merrill said, switching its recommendation on the stock to "underperform" from "neutral", with a revised target price of 47p from 56p previously. "We believe this can only be addressed through the adoption of a pay model. This would not be a new development, with US broadcasters now tapping pay revenues with re-transmission fees, a trend which has been transformational for their profitability."

Building on the results of a consumer survey, Merrill went on to advocate a wholesale, as opposed to a retail, pay model. "A wholesale model would involve ITV selling its channels to pay-TV retailers, who would include them within their basic offerings taken by all subscribers," the broker explained as ITV fell by nearly 4 per cent or 2.1p to 52.4p last night.

Overall, the rally ran out of steam, with the FTSE 100 closing at 5,253.52, down 17.5 points, and the FTSE 250 shedding 42.8 points to end at 9,895.61. The move down was pinned on a renewal of worries about European debt woes and the pace of Chinese growth, with profit taking weighing on the mood across the London market. Mid-afternoon rumours of an impending ratings downgrade for Spain further sullied sentiment, although traders cautioned against reading too much into the chatter. No downgrade was forthcoming by the close.

In the mining sector, Rio Tinto was broadly unchanged at 3,134.5p, down 0.5p, after issuing a second-quarter production update, revealing a 2 per cent decline in iron ore production and noting that in recent weeks, "fears about a possible double-dip recession in OECD countries and a slight slowdown in Chinese growth have led to some weakening sentiment".

Among the lenders, Lloyds Banking was the biggest loser, declining by 0.89p to 63p as Morgan Stanley raised its target for the stock to 55p but reiterated its "underweight" view. Of the others, Royal Bank of Scotland was 0.2p lower at 46.2p, while HSBC lost 4.7p to 639.7p. Standard Chartered and Barclays proved more resilient, adding 8.5p to 1,774p and 0.95p to 313.55p, respectively.

The inter-dealer broker Icap lost 20.1p to 416.1p after issuing an update on its first quarter, revealing that trade volumes slowed significantly in June amid a reduction in the risk appetite among customers and end investors.

BP also fell back, with the oil giant trading down by 9.35p to 401p after delaying a critical pressure test on a cap on the leaking Gulf of Mexico wellhead by 24 hours.

On the upside, the chip maker ARM continued to strengthen, adding another 9.6p to 318.5p and claiming pole position on the blue-chip index as Tuesday's bid rumours were replaced by the read-across from Intel's results, which were published overnight. The American semiconductors giant revealed the best quarterly figures in its history, with profits smashing Wall Street expectations.

The water company Pennon was 11p lower at 571.5p after UBS turned cautious, switching its stance to "neutral" from "buy". The broker said that, excluding possible upside gains from potential deal activity, it saw better value elsewhere, noting that Pennon traded at a 5 per cent premium to regulated asset values (RAB), against a premium of 3 per cent for the wider sector. UBS went on to recommend FTSE 100-listed peers United Utilities, which trades in line with RAB, and which was 6.5p worse off at 553.5p last night, and National Grid, which trades at a 3 per cent discount to RAB and closed at 497.1p, down 1 per cent or 4.9p.

Talktalk telecom, the broadband and phone provider which was split from Carphone Warehouse, drifted south, easing 0.6p to 119.7p despite analysts at the Royal Bank of Scotland highlighting the scope for higher margins and earnings growth. Initiating coverage with a "buy" view, the broker also highlighted the company's attractions to bigger players in the telecoms space. "As an independent operator with scale, we believe TalkTalk has strategic value to other telecom operators that may look to expand their presence in the UK market or add fixed broadband capability to their existing offering," RBS said, setting a 160p target on the stock.

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