TalkTalk will struggle to grow, but the shares are a reasonable buy for income, says Phil Oakley.
The business
TalkTalk (TALK) has positioned itself as a “value for money” telecoms company. It is the third-biggest provider of broadband services in the UK. A modern telecoms network means that it has lower running costs than BT and the cable operators, and it passes these benefits on to its customers.
It mainly offers phone and broadband internet services to just over four million residential customers. It also provides a SIM-only mobile phone service and will start offering pay-TV later this year. Around 20% of its sales come from selling telecoms services to businesses.
History
The company can trace its roots back to 2002 when Carphone Warehouse bought Opal Telecom. The TalkTalk brand was created the following year. It quickly set about enticing customers with eye-catching offers such as free phone calls with other TalkTalk customers.
In 2004, it started offering broadband internet services. With the freeing-up of the UK residential telecoms market in 2005, TalkTalk promoted itself heavily as a cheaper alternative to BT, but often courted controversy by doing so.
In 2006 it decided to offer free broadband to customers, but could not cope with the huge surge in customer interest. It has consistently remained one of the most-complained-about telecoms companies ever since.
TalkTalk has built its market position on the back of buying other businesses such as One.Tel, AOL Broadband and Tiscali. In 2010, the business was spun out of Carphone Warehouse as a separate company.
It has recently announced its intention to enter the pay-TV market by becoming a partner in YouView – a catch-up TV and bespoke pay-TV service aimed at people who mainly watch free-to-air television.
The chief executive
Diana ‘Dido’ Harding has been chief executive since 2010. Before joining TalkTalk she held senior roles at Sainsbury’s and Tesco.
She is married to Conservative MP John Penrose and is an avid horse-racing fan. Her horse, Cool Dawn, won the Cheltenham Gold Cup in 1998. She was paid £916,000 last year and does not own any shares in TalkTalk.
Should you buy the shares?
TalkTalk operates in very competitive markets. Its main rivals – BT, Sky and Virgin – are all trying to woo customers by offering the so called ‘triple play’ of phone, broadband and TV bundles.
TalkTalk also has to fight against a poor reputation for customer service – complaints to the regulator Ofcom have reduced sharply.
So will its investment in the YouView TV service pay off? Allowing people to buy sports and films on flexible terms might appeal to some households, but can it take customers from the likes of BT and Sky?
A strategy of giving away free set-top boxes will cost the company £140 for each new TV customer. So it starts to look as though ‘triple play’ could end up being a defensive and expensive strategy to stop people from leaving rather than a way of growing the business.
Unless TalkTalk can offer an all-in-one service that is cheaper and better than its rivals, the business may not grow that much. The company certainly isn’t expecting miracles and is only targeting sales growth of 2% per year. Profits growth is expected to come mainly from efficiency gains. This should boost the company’s cash flow and allow it to increase its dividend by 15% for the next two years.
With a dividend yield of nearly 6%, TalkTalk looks a reasonable option for income-seekers, but the shares look fairly priced for now.
The numbers
Stockmarket code: TALK
Share priceL: 174p
Market cap: £1.6bn
Net assets (March 2012): £444m
Net debt (March 2012): £434m
P/e (current year estimate): 10.3 times
Yield (prospective): 5.8%
What the analysts say
Buy: 10
Hold: 6
Sell: 2
Average price target: 190p
Directors’ shareholdings
D Harding: 0
A Stirling: 536,687
D Goldie: 945,460