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TalkTalk showing signs of recovery

The low-cost telecoms operator's resilient performance suggests the worst is over
May 12, 2016

Few will envy TalkTalk Telecom (TALK). The cut-price telecoms provider is still weathering the fallout of a cyber attack in October that put the personal information of nearly 157,000 customers at risk. Strong momentum running into the incident, together with damage control afterwards, pushed adjusted cash profits up 6 per cent to £260m in the year to the end of March.

IC TIP: Hold at 274p

In light of the hack and poor publicity, TalkTalk's fourth-quarter figures could certainly have been worse. After shrinking by 101,000 in the third quarter, the number of 'on-net' customers - who are served by the group's equipment rather than BT's exchanges and make up over 97 per cent of the total customer base - was flat. Moreover, churn fell to a record low of 1.3 per cent. Management cited recovering sentiment, marketing to existing customers and its group-wide simplification programme for the improvements. Meanwhile, savvy pricing of its 'quad-play' bundles of television, broadband, mobile and landline services pushed average revenue per on-net user up 3.9 per cent.

Strong demand for high-speed broadband meant TalkTalk added 72,000 fibre customers in the fourth quarter, up from 54,000 in Q3. Moreover, new products such as an enterprise offering helped to grow its mobile customer base by 90,000, almost a sevenfold increase from the preceding quarter. And strong demand for data and online-calling services drove sales up 5 per cent in the business division, which accounts for over 30 per cent of group turnover. The only weak spot was the television business, which lost a few customers as management prioritised other divisions.

TalkTalk incurred £83m in one-off costs from restructuring and the cyber attack. But management expects to unearth £90m in annual cost savings by next March. In a show of confidence, it raised the dividend and guided towards at least a matching payout this financial year. And although it anticipates modest revenue growth, it expects headline cash profits to jump to between £320m and £360m. Broker Credit Suisse expects adjusted pre-tax profits of £166m this financial year, giving EPS of 16.0p (FY2016: £48.2m and 9.3p).

TALKTALK (TALK)
ORD PRICE:274pMARKET VALUE:£2.6bn
TOUCH:274-275p12-MONTH HIGH:413pLOW: 184p
DIVIDEND YIELD:5.8%PE RATIO:NA
NET ASSET VALUE:24p*NET DEBT:294%

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20121.6912715.69.0
20131.6712211.310.4
20141.72313.112.0
20151.80327.813.8
20161.84140.215.87
% change+2-56-97+15

Ex-div: 7 Jul

Payment: 3 Aug

*Includes intangible assets of £722m, or 76p a share