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Turning point for TalkTalk

RESULTS: Stronger take-up of higher-margin 'on net' broadband customers has helped TalkTalk boost gross margins to 54.7 per cent, up from 51.5 per cent, and supports tantalising dividend growth prospects.
November 13, 2012

Dido Harding, chief executive of TalkTalk (TALK), hailed the company's performance in the three months to the end of September as the firm's best quarter in two years. "We're at a turning point," she said. "With improved customer experience, stronger cash flow, and improved profits and dividends, we're now in a position to grow the business."

IC TIP: Buy at 199p

There are good reasons to agree. Stronger take-up of higher-margin 'on net' broadband customers helped boost gross margins to 54.7 per cent, up from 51.5 per cent. The launch of two services - YouView TV and mobile - also promises to boost average revenue per user (ARPU) and 'lock in' customers. Ms Harding does not reveal subscriber number targets for TV and mobile, but claims take-up is on track with 29,000 and 117,000 customers, respectively.

Growth in the on-net subscriber base is not yet translating to overall sales growth, as TalkTalk is purposefully winding down its lower-margin off-net subscriber base.

Customer service, however, continues to be a TalkTalk weakness. While Ms Harding says complaints to Ofcom have fallen by 38 per cent, June figures from the UK regulator show TalkTalk was typically receiving about twice the number of complaints per 1,000 customers than its rivals.

Strip out exceptional items and headline EPS rose from 7.6p to 7.8p. Barclays forecasts an adjusted full-year EPS of 12.5p, rising to 17.7p the following year on pre-tax profits of £191m and £210m.

TALKTALK TELECOM (TALK)

ORD PRICE:199pMARKET VALUE:£1.83bn
TOUCH:199-20012-MONTH HIGH:204pLOW: 118p
DIVIDEND YIELD:4.9%PE RATIO:17
NET ASSET VALUE:44p*NET DEBT:110%

Half-year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201184441.08.102.60
201282846.04.303.45
% change-2+12-47+33

Ex-div: 21 Nov

Payment: 14 Dec

*Includes intangible assets of £652m, or 71p a share