Investors who flocked back into TalkTalk (TALK) in February 2017 – when newly returned Telecom founder Sir Charles Dunstone promised “another successful performance this year” – would have done well to recall the words of Warren Buffett: “invest in companies that underpromise and overdeliver”. TalkTalk has done the opposite. Adjusted cash profit expectations for the financial year to March 2018 have been trimmed three times in the past nine months, most recently to between £230m and £245m – down more than a fifth on last year’s numbers.
And yet, Sir Charles remains optimistic that there is “real opportunity to continue growing” and forecasts a 15 per cent uplift in adjusted cash profits in 2019. But too many inflated promises and inadequate deliveries mean investors are struggling to get excited about the outlook. The shares have fallen by half since October and, at the start of February, hit an all-time low of 99p.
So, is this a buying opportunity, or would investors be foolish to believe that Sir Charles and his team have the capacity to turn things around?
Analysts at Numis are leaning towards the latter option. They placed their 'reduce' recommendation under review following the third-quarter trading update in which management slashed profit expectations, cut the dividend and raised £200m via an equity placing. The broker fears that consensus analyst estimates for the 2019 financial year will be cut significantly because “TalkTalk’s guidance record is poor”.
But management at the budget telecoms group is confident about a return to profit growth now that its customer base is expanding. In 2018, TalkTalk expects to add 150,000 new mobile and broadband customers and reckons it can replicate that the following financial year. Spending is due to come down and efficiencies increase, now that the initial costs associated with attracting new customers are beginning to normalise. Moreover, the wholesale costs of renting Openreach’s fibre-optic cables are due to fall from £7.40 to £4.50 per month later this year once media regulator Ofcom caps customer charges.
In the long term, TalkTalk may shed its dependence on Openreach’s fibre cables completely thanks to its planned investment in fibre-to-the-premises infrastructure. The group has teamed up with Infracapital, the infrastructure equity investment arm of M&G Prudential, to roll out full-fibre broadband to more than three million homes in mid-sized towns and cities in the UK. The two companies will contribute £500m of cash over the next five years (£100m from TalkTalk) with a further £1bn provided by debt. The group plans to begin its rollout by increasing the amount of fibre-optic cables in York, where its own cable network reaches 14,000 homes.
These plans will be partly funded by the £200m equity placing announced alongside the trading update. But even with this extra cash, management thinks net debt will have hit three times adjusted cash profits by the year-end and have therefore cut the dividend to 2.5p, from 10.29p for 2017. The payout is reflective of the group’s “investment phase” and will only be increased once net debt falls to two times adjusted cash profits.
