Martin Flanagan: Why ITV's performance didn't impress market judges

Published on Wednesday 3 March 2010 20:17

ITV'S muted share price reaction to the broadcaster's bounce back into the black was eloquent. The stock closed down 0.1p at 55p yesterday despite a £25 million profit replacing a £2.73 billion loss in 2008, the latter due to an impairment charge against broadcasting and online assets.

Plainly, the stock market judges that the new management team at the ITV helm, chairman Archie Norman and chief executive-designate Adam Crozier, will have their work cut out transforming the company against an unhelpful backcloth.

Yes, there looks to be a notable rebound in the advertising market for the group in the first few months of 2010 from the trough of 2008.

A 7 per cent jump in advertising revenue predicted by ITV for January-March this year, with a 15-20 per cent jump forecast for April, is better than most City analysts expected.

But the first half of 2010 has much easier revenue comparatives for ITV than the second half is likely to enjoy, particularly given the unexpected strength of TV advertising in the final trading quarter of 2009 as the UK emerged from recession.

ITV's current revenue rises are also coming from a very low base this time last year. In short, the company is enjoying a fillip but the advertising game gets tougher from here.

ITV needs to develop further revenue streams to cut its dependency on cyclical advertising revenues.

In the interim, no doubt, the company's default position will be to continue to cut costs, an activity Crozier has shown himself a dab hand at with his previous employer, Royal Mail.

ITV took 169m from its cost base last year, including 1,200 jobs, which was more than the targeted 155m.

But cost-cutting is the easy part of company turnarounds. It is the vision thing that is more problematic and what separates the business winners from the losers and also-rans in the medium-to-long-term.

Crozier and Norman's other disadvantage is that they will be trying to repair the ITV house, including the roof tiles of rising digital competition, in the midst of high economic winds.

Whichever party wins the coming general election, public spending will be cut. It is just a question of the speed and degree. And that is bound to limit the advertising that will come to ITV.

The wider post-recession backdrop of slow, incremental economic growth at best is also not conducive to a sustained improvement in ITV's advertising fortunes.

If the company as a whole was currently auditioning for The X-Factor, one suspects Simon Cowell would raise a very quizzical eyebrow.

Prudential needs to explain imprudent-seeming price

PRUDENTIAL spooked the market on Tuesday with news of its audacious plan to bid $35.5bn for AIG's Asian business, AIA, and use a massive rights issue to do it.

The Pru's shares slumped 42.5p to 487.5p that day. Don't be fooled by the stock's partial 12.5p recovery yesterday. This is not the market thinking that it may have over-reacted in its negativity to the Asian push. Many in the City are still kicking the tyres of this acquisition car.

Few dispute that Asia is set for strong economic growth. Look at recent clear statements of intent towards the region by corporate heavyweights such as HSBC and Diageo.

But the Pru's financial valuation of AIA is justifiably being questioned. The group is paying up to three times as much for AIG's Asian arm as the British company's own – very successful – Asian business is deemed to be worth by the market.

That means Prudential would have to work the AIA assets very hard to make the arithmetic of this ambitious takeover stack up.

Too hard is what the market is currently saying. Even with yesterday's bounce, Prudential's shares have shed about 17 per cent of their value since the deal was announced. Obviously part of this scepticism is uncertainty over the pricing of the company's $20bn rights issue. That will only come at the end of next month.

But it is not the only reason for the negativity. The market suspects that euphoria about Asia's growth prospects may be leading Prudential to simply overpay, in much the same way that Royal Bank of Scotland was thought to have overpaid for ABN Amro.

The Pru needs to make a better public case, not for the strategy, but for the price.