Join our community of smart investors

More groans than cheers for TalkTalk overhaul

The telecoms business is looking to return to its low budget roots
May 10, 2017

It's all change at telecoms company TalkTalk (TALK). The new management team, led by the group's enigmatic founder Sir Charles Dunstone, is aiming to "rediscover the group's DNA as a challenger brand" by overhauling its strategy. Growing the customer base is the new priority, which means marketing expenditure is due to increase in the 2018 financial year. As a result TalkTalk's adjusted cash profit is expected to fall to between £270m and £300m in the year to March 2018, from £304m for this period. Deleveraging is another key commitment, which means the dividend has been cut in respect of the reported year and FY2018, and will only increase once the group returns to earnings growth. Investors did not respond well to this update, in one morning wiping out almost all of the share price gains that have been made in the past few months.

IC TIP: Hold at 164p

TalkTalk has had a tough few years. The group's reputation was damaged by a major security breach in 2015, while rising competition in the telecoms space has put pressure on providers to find their niche: something TalkTalk has struggled to do.

That said, the launch of its fixed low price plan - which freezes broadbrand prices for the duration of the contract - in October 2016 helped increase overall customer numbers in the final quarter. There are now over 1m customers on the plan, making up 59 per cent of the group's total customer base. The corporate division is also performing well with revenue up 3.4 per cent, thanks to increased data revenue from the group's expanded Ethernet network. And after stripping out hack-related exceptional costs, headline pre-tax profit rose 24 per cent to £133m, thanks to £34m of cost savings.

It's the TV business where the group is struggling: 101,000 consumers left in the period. Average revenue per user also fell due to the higher proportion of customers using the networks TalkTalk leases from BT (BT.A), rather than the networks where it uses its own equipment within the BT exchange. On an earnings call, analysts raised concerns about the group's ability to increase revenue per user and the security of the dividend, considering the lack of earnings forecasts and heady net debt. Forecasts were being revised as we went to press.

 

TALKTALK TELECOM (TALK)

ORD PRICE:164pMARKET VALUE:£1.56bn
TOUCH:163-164p12-MONTH HIGH:280pLOW: 145p
DIVIDEND YIELD:6.3%PE RATIO:27
NET ASSET VALUE:15p*NET DEBT£782m

 

 

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20131.6712211.310.4
20141.72313.112.0
20151.80327.813.8
20161.84140.215.87
20171.78706.110.29
% change-3+400+2950-35

Ex-div: 6 Jul

Payment: 4 Aug

*Includes intangible assets of £738m, or 77p a share