The UK market for domestically commissioned TV programmes by independent production companies is worth around £1.1bn a year, and is growing annually by around 5%. This growth rate is likely to accelerate due to the vast potential of digital TV. Historically, the main terrestrial channels (BBC, ITV, Channel 4 and Five) and Sky have dominated the broadcasting market as they've controlled over-the-air distribution. But with the advent of digital and internet TV and the rise of competitors such as Santanta and BT Vision, the balance of power is shifting towards the independents, as broadcasters scramble to generate and buy top-quality content. There are also opportunities for independents to sell their programmes to the highest bidder anywhere in the world and gain from the expansion of sponsored in-programme advertising. So how can we benefit from this trend?
Well, DCD Media, chaired by David Elstein, a former chief executive of Channel Five, is one such independent riding the wave. The company was founded in 1999 and has bought six rivals over the past two years, transforming itself into one of the leading UK producers focusing on arts, entertainment, music and drama. Recent successes have included Stephen Fry's HIV & Me and reality TV show, The Cooks.
House broker Evolution Securities expects 2007/2008 sales and underlying earnings per share of £53.1m and 6.9p respectively putting the shares on a miserly p/e of nine. While this assumes a 5% tax rate, due to carried forward losses, I still believe the rating is too low for a quality business operating in an expanding market.
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So what are the risks? There could be problems integrating its acquisitions but the management already has a strong track record on deals. Also, the industry can sometimes shoot itself in the foot (just look at RDF Media's problems with the trailer for its A Year with the Queen series), and there is always a chance that regulator Ofcom may decide to remove the regulatory protection it presently offers the independents with regard to programme rights and commissioning. Finally, DCD Media's net debt is £11.5m, although this is expected to fall in 2008 and interest payments are covered a healthy six times.
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Overall, with the stock attractively priced and with an outside chance of being taken over as the industry consolidates, I rate DCD Media as a high-risk buy. And the chairman seems to agree, having spent £307,000 purchasing stock at 54p last week.
Recommendation: SPECULATIVE BUY at 62.5p (market capitalisation £33m)
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
