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TalkTalk Telecom Group - After the Attack

Steve Clayton | 11 November 2015 | A A A
TalkTalk Telecom Group - After the Attack

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TalkTalk's interim results cover the period immediately before the cyber attack, so the market is likely to focus on the forward-looking commentary, more than the numbers. The company say that growth improved in Q2, that the cost reduction programme is making the expected progress and that the development of their new mobile billing system is proceeding to plan.

The shares responded to the news by rallying 12%.

Significantly fewer customers were affected by the cyber attack than first thought, and where credit card data was accessed, the data was obscured, rendering it useless for making transactions, nor could individual customers be linked to the card data. The company believe that the impact of the attack on full year profits will be £30-35m. All customers are to be offered a free service upgrade to reward them for their loyalty. Early data on churn and retention activity after the attack is encouraging.

Excluding the impact of the cyber attack, TalkTalk say they are confident of meeting full year market expectations, with continuing strong revenue growth, improving gross margins and lower operating costs.

They remain confident of a material increase in profits in FY17 and beyond.

Our view:

The singer Dido has two songs that her namesake, Dido Harding, TalkTalk CEO probably can't get out of her head. We suspect she prefers "Let Us Move On" over "Everything to Lose". The cyber attack on the company was handled badly, with hindsight. Few people were affected and little of any value was taken. Yet TalkTalk dominated the headlines for days on end.

Clearly, the company's systems were tested and found wanting, and TalkTalk have a job to do rebuilding customers' confidence in the integrity of their systems. But offering everyone, not just those whose data was accessed, a free upgrade is savvy; no one should mind the offer and those who take it up will presumably be re-contracting for another year or more. So hopefully, for limited cash cost, TalkTalk will make their customer base more secure.

Making TalkTalk Simpler is on course to deliver lower costs, a more nimble organisation and greater scope to cross-sell products. The quad-play concept is at the heart of TalkTalk and growing numbers of customers are taking multiple services. Churn has been low, and hopefully the company's efforts to retain customers will keep it so.

If the company really has drawn a line under the incident, then investors can look forward to the benefits of MTTS dropping through to the bottom line. Given the company reported EBITDA of £199m last year, a £90m+ benefit over the next few years is very significant.

After the recent de-rating of the stock, the shares offer a high yield (variable and not guaranteed) and if the company do follow through with the expected 15% increase at the full year stage, the stock could be offering a yield of almost 6.5 % (variable and not guaranteed).

The business is not out of the woods, but if it can keep cross-selling mobile, broadband, TV and landlines to clients, building that base of double, triple and quad-play customers then its quality of revenues should steadily increase. Clients that take multiple services are stickier than single-service ones. TalkTalk's rising profitability, increasingly sticky and growing customer base looks attractive to us. It may also look attractive to telecoms and utility players seeking to grow their own quad-pay clientele.

Key Details:

In line with the Group's plan for 5% revenue growth in FY16, revenue accelerated through H1, with 5.9% growth in Q2, to leave H1 revenues 4.7% ahead.

On-net revenues rose 6.2% in Q1 and 8.9% in Q2, and Average Revenue Per User improved by 6.1%. FY 2016 H1 EBITDA of £90m (FY 2015 H1: £110m) was affected by the costs of significant planned investments into the Making TalkTalkSimpler transformation plan.

Broadband saw improved market conditions in Q2. Net additions were negative 80,000, mainly comprising 72,000 non-paying customers who were disconnected. TalkTalk focused selling efforts on cost-effective customer acquisitions when market conditions were most competitive.

Mobile customer numbers rose by a net 132,000, taking the base to almost 600k. Once the new billing system is built out and customers are migrated onto the Telefonica network, TalkTalk expects a material improvement in mobile profitability.

Fibre saw 99,000 net new fibre broadband customers taking the base to 578k.

Making TalkTalk Simpler (and hopefully making hacking TalkTalk more difficult) delivered £6m of cost reductions in H1, up to a further £30m in H2 and is on course to deliver total annualised savings, plus an improved customer proposition, of over £90m by the end of FY17.

The interim dividend is raised by 15% to 5.29p and the final dividend is also expected to grow by 15%. CEO Dido Harding said "TalkTalk is well established as the value for money provider in the fast growing quad play market and, notwithstanding the recent attack, remains well positioned to deliver strong and sustainable long term growth".

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.