Broadcasters don’t stop transmitting television programs during a recession. That’s why Tom Bulford says ContentFilm (LON:CFL) could be a great penny stock for this downturn. The company has a low-risk business model and is trading at a huge discount today. But Tom says investors need to watch out for a £9 million preferred shares liability due in March 2009.

This from Fleet Street Invest:

‘Welcome to the new West! Where overnight oil millionaires with Porsches and over-the-top mansions butt up against the salt-of-the earth cattle and rodeo country. It’s a place where fortunes are made in the tar sands at noon and lost on the poker tables at night.’

Phew! I don’t think we’re talking about Ilfracombe! More like Dallas, I should say. And this is indeed the promotion for a television series called The Wild Roses, described as an ‘epic clash between two families on opposite sides of Calgary’s oil boom’. Sounds good, doesn’t it?

But what concerns me today is not this riveting saga, but the story of ContentFilm (LON:CFL). This penny share company owns Fireworks International, the distributor of The Wild Roses and many other television shows. Could this be a share for these troubled times? After all, as I have said in my ‘Bounceback Report’, I am on the look out for companies that supply life’s essentials – and, let’s face it, to many people the TV is one of them!

So I went down to London to see ContentFilm’s American chief executive, John Schmidt. We met in a restaurant close to the group’s office just off Regent Street. The rain was lashing against the windows, the kitchen was suffering from a power cut and the stock market was crashing around our ears. The omens were not propitious but the sense of gathering doom was confounded by the calm demeanour of Schmidt.

Maybe this had something to do with the fact that he had recently returned from Cannes. He was there to attend the massive TV industry jamboree, MIPCOM. It’s where media journalists try to spot the stars of the small screen, senior executives discuss the great issue of the day – how the new digital communication channels will affect TV – and broadcasters tour the exhibition halls in search of programs to show on their own networks.

A business model that’s well-suited to recessionary times

Recession or no recession, broadcasters have to transmit something, and Schmidt told me that MIPCOM had been ‘business as usual.’ But still the recession is having some effect. Whether funded by advertisers or by viewers, broadcasters are worried about their revenues. That means more repeats and more factual programmes which always sell well. It also means less appetite to take a chance on expensive and unproven new drama.

All this suits ContentFilm rather well, because it has a library of two thousand hours of television programs. It has also acquired a rosta from the Canadian Broadcasting Corporation last year, including a good percentage of factual programmes. So ContentFilm has regular repeat sales of programs from its catalogue and when it acquires the rights to new content, which include both TV shows and feature films, it has a good idea of how it will sell.

There for ContentFilm has quite a low-risk business model. It does not get into the speculative business of financing new production, it knows its market and it has put its formerly troublesome DVD business into a joint venture with promising early results. So the shares should be a good investment at this time of recession. And yet the price has fallen by 80% in the last year! ContentFilm is now valued by the stock market at just £7m, and at 4p the shares trade at just two times earnings! Surely a bargain?

Why March 2009 will be critical for this share’s performance

Well, not so fast. Here’s why you always need to look a little deeper. You can’t just pile into penny shares without doing your research.

As in the plot of any good television drama, there is a catch. You see, five years ago ContentFilm issued 34.9m Convertible Preference Shares. Holders could either convert each preference share into one ordinary share, or else they can be redeemed at a price of 26p next March. With a choice between 26p or a share trading at 4p there is only one answer. The preference share holders will want their 26p back. That means that ContentFilm will have to come up with more than £9m. Such is the fate of the best laid financing plans!

This £9m liability has been hanging over the shares like a curse. But it must be resolved soon. The share price has started to edge up and I sense that some form of compromise agreement may soon be announced. The redemption date of the Convertible could be extended to give ContentFilm more time to pay, or to give the shares more time to recover to the 26p level at which convertible holders might convert into equity rather than taking the cash.

This is a battle not between rival families in Alberta, but between holders of the ordinary shares and the preference shares. The question is, will it have a happy ending – or will it be a disaster?

Source: Could This Tiny TV Stock Be A Great Recession-Busting Investment?