Market Report: Recovery hopes lure investors into ITV

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The Independent Online

The prospect of a recovery in the depressed advertising market powered ITV 12 per cent higher yesterday, as Goldman Sachs fuelled hopes that the broadcaster could soon enjoy a reversal of fortunes.

Waning advertising revenues have played havoc with valuations across the media sector and highly cyclical stocks such as ITV have been among the hardest hit, with investors selling on fears of a prolonged slump in earnings. The broadcaster was also hit by worries about its balance sheet, as the clouded outlook brought concerns about leverage to the fore.

But the trend may soon go into reverse, according to Goldman, as a more stable macro picture, and improving forward advertising data, turns the company's key weakness – the close correlation of its earnings with the rhythms of the wider economy – into strength. Goldman estimates that every percentage point shift in advertising revenues impacts the company's earnings by 5-6 per cent, a link that may be exaggerated as regulatory changes and cost savings kick in. Better earnings prospects should also take the heat off the company's balance sheet, as investors reassess the issues.

"We expect forward advertising data to increasingly show signs of stabilisation over the second and third quarters," the broker said, adding: "Trinity Mirror and Daily Mail & General Trust have commented on signs of improving national press advertising trends in April and May for instance."

By the close, ITV was up 3.5p at 31.5p, while Trinity gained 5.6 per cent or 3.75p to 70.75p, and DMGT rose 6.1 per cent or 18.7p to 324.5p.

Overall, the market was broadly unchanged, with the FTSE 100 rising slightly to 4,416.23, up 4.5 points, and the FTSE 250 gaining 58.03 points to 7,588.05.

The banking sector was a mixed bag, with Lloyds, down 1.3p at 65.5p, easing as Credit Suisse highlighted the negative read-across from Nationwide, which posted full-year results. HSBC, up 10.7p at 551p, Standard Chartered, up 15p at 1248p, and Barclays, up 0.75p at 290p, remained firm.

"That Nationwide can be flagging a potential decline in profits towards zero (or even negative?) in the next 12 months is clearly bad news for the UK domestic banks," Credit Suisse said. "Our focus remains the margin, which fell 12 per cent at Nationwide in the last six months alone."

Royal Bank of Scotland fell back, retreating by 1p to 39.2p, amid reports that HSBC and Standard Chartered had not submitted bids for its Asian assets, leaving the Australia and New Zealand Banking Group, or ANZ, in the auction for now.

Capita, the outsourcing group, was firm, rising by 12.5p to 725p. Paul Pindar, the company's chief executive, recently presented at Cazenove, which reiterated its "outperform" stance. "Capita's public sector business, particularly its central government business, may well now see an acceleration in the pact of outsourcing caused by a deterioration in public sector finances," the broker said, adding that, while there was a downside risk to estimates owning to the current economic climate, organic turnover growth should range between 10 per cent and 17 per cent, and that its own forecast of 10 per cent growth in coming years seemed reasonable in the circumstances.

Elsewhere, water companies, which were in focus following downgrades by Bank of America-Merrill Lynch in the session before, drew strength from a Credit Suisse circular, which dished out a series of upgrades, saying that the sector rally was likely to persist at the equity risk premium (ERP) relaxes in line with the cost of capital.

"Our analysis suggests the equity risk premium discounted by the sector is still 7.3 per cent ... whereas our strategists believe the warranted ERP is just around 5.4 per cent," the broker said. "To this end, we think the rally in water is set to continue."

Severn Trent, which was moved to "neutral" from "underperform", climbed to 1,158p, up 1.7 per cent or 19p, while Northumbrian Water, which was moved to "outperform" from "neutral", rose to 249.75p, up 1.3 per cent or 3.25p. United Utilities, which was also moved to "outperform", was slightly higher at 543p, up 1p.

Further afield, soft drinks group Britvic retreated to 275p, down 5.3 per cent or 15.5p, as it emerged that Permira, the private equity group, had offloaded its 14 per cent stake in the company. Cazenove, which attributed part of the weakness to ex-dividend trading, said that although the sale may place some short pressure on the share price, it was a positive development. "Permira has long been seen as likely to dispose of its stake, with the overhand a cause of negative sentiment for the shares," Cazenove, which maintains an "outperform" rating on the stock, said.

Among smaller companies, JJB Sports, up 5.7 per cent or 2p at 37.25p, was in focus amid heavy trading, as a mystery buyer snapped up a chunk of shares in the sports retailer. Traders pointed to the usual suspects, including Sports Direct and JD Sports, as the likely buyer, but one veteran of the sector said the buyer may not be British, highlighting speculation regarding a possible foreign investor.

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