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Talktalk - "Returning to normal"

Charlie Huggins | 2 February 2016 | A A A
Talktalk -

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Talktalk Telecom Group Plc Ord 0.1p

Sell: 80.60 | Buy: 80.75 | Change -1.55 (-1.89%)
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TalkTalk shares rose by over 6% in early morning trading after the group released reassuring Q3 results, covering the period immediately after the cyber-attack.

Talk Talk added fewer new customers and experienced higher churn in the immediate aftermath of the attack. On-net adds fell by 101k in the quarter, with an estimated cyber impact of 95k.

The period of online shut-down also affected the group's ability to upsell Mobile, Fibre and TV; although revenue generating units per customer still grew by 9.2%. Total RGUs declined by 70k, however, due to lower customer numbers. On-net revenues grew by 4.5% and total revenue rose by 1.8%, with an estimated cyber impact of c3%.

"Returning to normal"

Talk Talk offered an unconditional free upgrade to all customers following the attack which was more successful than expected. Churn and new connections recovered during December and January; and there was a return to positive growth in revenue generating units in January.

Outlook for profits and dividends

Talk Talk now expect FY16 EBITDA of £255m - £265m (includes a c. £15m trading impact from the cyber attack) and FY17 EBITDA of between £320m - £360m. This compares with analyst consensus estimates of c. £274m and c. £342m, respectively. Exceptional costs associated with the attack (which include restoring online capability with enhanced security features) are expected to total £40m-£45m this year.

The group still expects to grow this year's final dividend by 15%. They expect the FY17 dividend to be no lower than in FY16 and for this dividend to be covered by free cashflow, with net debt reducing during the year. The group remain "very confident" in the long term outlook.

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. The group offered a free upgrade to all customers following the attack, with almost half a million taking up the offer. This seems to have helped restore some trust in the brand, with churn and new connections recovering during December and January.

Making TalkTalk Simpler (MTTS) 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. Profits are expected to recover in the second half of FY16, and to grow strongly in FY17. Importantly, TalkTalk plans to raise the final dividend by 15%, while holding next year's dividend flat. This puts the stock on a yield of around 6.8%.

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.

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 disclosure for more information.