Flextech shares leapt last week following a sharp drop of 17 per cent over a two week period. Analysts at Merrill Lynch put out a note on the company with an ‘accumulate’ recommendation on August 3. Merrill Lynch previously had downgraded its profit forecast for Flextech due to what it described as "short term factors on TV Travel Shop".

According to the analysts, Flextech’s bottom line will be adversely affected by heavy investment in Travel Shop and the strength of the US dollar. Merrill Lynch forecasts an interim headline loss of Pounds 5.2 million compared with the small loss the company made last year.

Merrill Lynch is bullish about the prospects for Flextech’s SceneOne interactive guide. Flextech is currently negotiating for carriage of SceneOne as part of the Open… interactive platform on BSkyB and, although a Flextech spokeswoman last week said that the deal has yet to be closed, the analysts expect that an agreement will be signed shortly.

On the plus side in the longer term, Merrill Lynch expects the all-new look TV Travel Shop to gain from increased distribution next year, while the expected shutdown of analogue in 2004 should mean a saving of Pounds 8-10 million per annum. Merrill Lynch’s analysts also believe that some further acquisitions, notably that of Sci-Fi Channel are to be expected, although in the last two weeks it has been reported that Flextech’s attempt to buy out BSkyB’s minority stake in the Granada Sky Broadcasting channels has been abandoned due to too high an asking price.

Merrill Lynch expects over one third of Flextech’s profits to come from its transactional TV activities by 2002, rising to over a half by 2005. The 87.5 per cent Flextech-owned TV Travel Shop will lead the way, producing profits of Pounds 17.4 million by 2005. Merrill Lynch’s analysts expect the transactional TV units as a whole to become profitable in 2001. Total revenues from the core channels are expected to be Pounds 104.5 million in 2001, rising to Pounds 155.5 million in 2005, while revenues from transactional TV are expected to reach Pounds 58.9 million in 2001, rising to Pounds 105.9 million in 2005.

Last year the creation of Flextech Interactive, including TV Travel Shop and home-shopping service Screenshop, led to losses of Pounds 13.3 million for the company. The launch of TV Travel Shop required significant marketing costs to promote the service to consumers. According to its 1998 annual report, Flextech earmarked a total of Pounds 20 million for further investment in its interactive activities this year.