TalkTalk, the income play

The seller of cut-price telecoms bundles has around 4m phone and broadband customers, including 740,000 users of high-speed fibre, as well as 750,000 mobile subscribers and about 1.37m television customers. It suffered a cyber attack in October that put the personal information of around 157,000 customers at risk. But management curbed subscriber losses through free upgrades, smart marketing and improved customer service.

TalkTalk lost only 9,000 broadband users in the first quarter of the current financial year, significantly better than the 106,000 who quit in the third quarter of 2015-16 - when the data theft occurred - and the 12,000 who departed in the fourth quarter. It also attracted 36,000 fibre users and 48,000 mobile subscribers, although TV subscriber numbers fell by 23,000.

There are several positives in TalkTalk's first-quarter figures. Fewer subscribers meant sales to on-net users - who use TalkTalk's equipment rather than BT's exchanges and make up 97 per cent of its customers - fell 2 per cent in the first quarter. But corporate turnover rose 8 per cent, fuelled by a 39 per cent rise in data sales and 40 per cent growth in carrier revenues. Strong demand for mobile and fibre also drove the number of paid-for services per customer up 7 per cent to 1.72, and on-net churn remained low at 1.36 per cent.

That reflected management's plan to simplify the business, which is on track to generate up to £40m of cost savings this financial year and about £90m a year from 2017-18. However, combined with the cyber attack, that translated into £83m of one-off costs last financial year. TalkTalk is also switching its mobile network provider from Vodafone to O2, which promises to improve profitability and paves the way for the launch of 4G services soon.

The cyber attack hindered TalkTalk's progress in 2015-16, but the full-year results still support its growth prospects. Strong mobile and fibre demand drove on-net sales up 5 per cent, sending total adjusted cash profits up 6 per cent. Moreover, the group's marketing push meant paid services per customer rose 9 per cent to 1.7 in the fourth quarter, a period that saw its lowest ever quarterly churn and a 3.9 per cent rise in average revenue per on-net user. Another highlight was 5 per cent full-year sales growth in the business segment, which makes up over 30 per cent of total turnover. Management aims to double the division's size in the next few years by tapping into demand for online voice, mobile data and high-speed broadband.

TalkTalk's directors have indicated that first-half revenues will be down, but anticipate a modest rise in turnover and cash-profits growth of more than a tenth for the full year. They also expect net debt to fall to their target of roughly twice cash profits by the year's end. Broker RBC expects cash profits to rise 63 per cent this financial year, then 22 per cent in 2017-18. Meanwhile, TalkTalk's shares trade at 19 times forecast earnings for this financial year, falling to 13 times for 2017-18 (see table). And there's that dividend yield - prospectively 7.3 per cent this financial year, and 8.1 per cent next.