Broker tips: ITV, Premier Oil, William Hill

HSBC has upgraded ITV from ‘hold’ to ‘buy’ and increased its target price from 275p to 305p on prospects of what it thinks will be another strong year.

In a note on the European media sector issued on Monday, the investment bank said it isn’t worried about a “perceived structural weakness” when it comes to issues like audience numbers.

HSBC was also optimistic about the media company’s ad revenue for 2016.

“Media buyers are highly optimistic about 2016 compared to Street estimates (we now assume 5% NAR growth vs consensus closer at 3-4%) mainly driven by strong price increases.”

Holding broadcast rights to the UEFA EURO 2016 and Six Nations Rugby are also expected to help ITV.

It also believed programming expenses wouldn’t increase dramatically, excluding expenses once the acquisition of UTV is completed.

“Following the GBP1.04bn guidance for 2015, we are modelling only a very modest increase in 2016 of GBP1.05bn (ex-UTV scheduling costs) despite the UEFA EURO 2016,” HSBC said.

“We think the market is overly concerned that weak audiences need to be fought with a step-up in programming cost while we believe the bigger issue remains the content, not the amount of money spent.”

The note also signalled investors might be in line for some returns.

“ITV’s financial headroom remains sizable with deals greater than £1bn digestible as the focus will likely remain on consolidating the content production sector.

“Absent any bigger M&A deals in 2016, we would be surprised not to see sizable extra-shareholder returns (dividends) in 2016.”

Credit Suisse upgraded Premier Oil to ‘neutral’ from ‘underperform’, noting the big drop in the share price since it initiated coverage of the stock in December.

In addition, the bank pointed to Premier’s agreed acquisition of E.ON’s UK North Sea assets.

CS said the assets are cash generative, even at current oil and gas prices and would allow Premier to accelerate the utilisation of its UK tax loss position, which stood at $3.5bn at end-2015.

Credit Suisse said Premier had outlined three criteria for a deal before the E.ON acquisition: utilisation of its UK tax loss position, accretive to lending covenants and rapid payback.

The transaction with E.ON fits all three.

The bank said that while no guidance was given as regards specific cost synergies, these are likely to include a headcount reduction programme given the duplication of roles between E.ON and Premier's UK businesses .

CS cut its target price on Premier to 25p from 70p. It highlighted that the stock’s valuation is very sensitive to oil prices, so the TP has been set by taking the equally-weighted average of three Premier net asset value scenarios using Brent long-term prices of $65 a barrel, $70 and $75.

Premier shares have been halted from trading as the proposed acquisition is classified as a reverse takeover by the UK regulator.

William Hill was under the cosh on Monday after Investec reiterated its ‘sell’ rating on the stock following the gaming group’s trading update.

In a trading update last Thursday, William Hill reported full-year adjusted operating profit of £290m, in line with market expectations but lower than £372.2m the previous year. Net revenue during the period was £1.59bn down from £1.61bn a year earlier.

Chief executive James Henderson said its online unit suffered some disruption around the implementation of new sports betting mobile web and iOS app Project Trafalgar, which was launched during the fourth quarter, but “we are rapidly addressing that”.

“Our forecasts are broadly unchanged, however note that the transition risk relating to Project Trafalgar has fallen as the iOS transition is now complete,” said Investec analyst Alistair Ross.

“We increase our target price by 20p from 323p to 346p for lower transition risk (1/3 complete). With no transition risk relating to Trafalgar, our target price would be 382p. We maintain our Sell.”