City View: ‘Analysts have recently shown some renewed interest in media stocks’

David Hellier, deputy editor at City AM, on last week’s budget announcement; ITV, WPP and Aegis results; the gloomy world of press; and the growing interest in how BSkyB’s new internet offering performs…

The arguments over George Osborne’s budget will rage for weeks but the reality is that there was little in the March 2012 finance bill to knock the generally improving sentiment in the financial markets.

Being a coalition government, this was a very political budget. So Tories won on some issues, like lowering the rate of the 50p tax rate, seen by some as a major symbolic pro-aspirational move, while Lib Dems made them pay for this by raising stamp duty on £2 million plus homes.

Pensioners got caught up in the cross-fire, with an unexpected decision taken to freeze their tax allowances, but the furore this created was largely due to the fact that the move was one of the only ones that had not been leaked ahead of the day rather than the actual impact on pensioners, which will not be huge.

There was never much chance that Osborne would deviate from his deficit reduction plans nor any likelihood that he would signal even tighter cost cutting in the public sector, as some on the right have urged. So there were few surprises in the overall package; columnists were reduced to fulminating about which group got what at the expense of whom.

As a result the financial markets took the whole package in their stride and stocks have continued their relative firm progress, with the FTSE 100 index near seven month highs. But traders are still wary that further problems in the eurozone might knock it off its stride.

In the media sector, a triumvirate of companies, ITV, WPP and Aegis, have all recently produced results that have been well received in the City. ITV’s profits were up 14.3% but more importantly the broadcaster seems at last to have a strategy for developing new streams of income from video on demand and drama sales look strong. Analysts point out that faster growing markets account for around 30% of revenues at WPP and Aegis.

“In the case of all of them there was a positive message on the advertising outlook,” Ian Whittaker of Liberum Capital said. “Even though things are quite tough, advertising spending seems to be holding up well.”

In fact for the media sector, one of the biggest factors in the budget will have been the reassuring noises about growth. Not that it will be strong in any way, but there is general consensus in favour of the UK avoiding a dreaded double dip recession.

If a recession can be avoided, some media stocks look distinctly more attractive. Nicholas Shott, head of UK investment banking at Lazard, said: “Analysts have recently shown some renewed interest in media stocks, with some being geared to economic recovery.”

Even in the gloomy world of traditional print media, where paid for sales continue to decline, there can be rays of sunshine, with Alex de Groote highlighting the potential of DMGT’s digital assets in the light of CNN’s expected $200 million acquisition of the social media group Mashable. De Groote places a £120 million value on the Mail‘s current online assets but these are early days still in the site’s development, so there is still potential for growth.

Whittaker, however, points out that pure traditional news sites, which the Mail‘s site isn’t (it focuses on celebrity human interest stories and sport), have trouble proving effective for advertisers, especially given they come up against very well funded competition from the BBC. That kind of analysis would not be good for the Guardian, which has pinned all its hopes on a free to access traditional news model (with interactive features but still a site largely modelled on a newspaper).

Last but not least, there will be growing interest in how BSkyB’s new internet offering performs. Called NowTV, the service will allow consumers to subscribe to individual movies (and later sports events) over the internet in a more a la carte fashion than they do now.

In theory this will open up Sky to more potential customers – 13 million UK homes currently have no pay television access – but the beauty of the television offering for the broadcaster has always been in being able to wrap a subscriber into a bundle (so if you are a sports fan, you buy the channels but also have to go through a basic Sky package). The interest now will be in seeing whether the new internet service cannibalises any of the broadcaster’s existing 10 million subscriber base.