Why I’ve changed my mind

If you’ve read my previous coverage of TalkTalk over the last few years, you’ll know that I’ve been avoiding the stock. So what has changed?

I think the plans set out by founder Sir Charles Dunstone when he returned to the firm in May 2017 are starting to deliver results. The main thrust of the strategy is for it to be a large-scale value provider of fixed broadband only.

Figures released today suggest that progress is steady. The company reported a net increase of 490,000 subscribers for fibre broadband. Total customer numbers rose by 150,000 to 4.3m and the firm has now seen nine consecutive quarters of growth.

Of course, it’s easy to win customers by slashing prices. So is TalkTalk becoming more profitable as well?

Rising profits

Today’s figures are mixed. Underlying revenue rose by 2.2% to £1,544m, while operating profit excluding certain one-off costs rose by 46% to £89m. Much of this gain was due to lower operating costs, which the firm says will be a continued focus.

Restructuring and network upgrades are continuing to absorb much of the firm’s spare cash. But even if we include all costs, TalkTalk moved from an operating loss of £44m to an operating profit of £47m last year.

More importantly, cash generation improved, leaving the dividend covered comfortably by free cash flow. Net debt remains a concern, at £781m. But no significant repayments are due until 2022, by which time costs should be lower and income higher.

TalkTalk shares don’t look cheap, with a 2019/20 forecast price/earnings ratio of 18 and a forecast dividend yield of 2.8%. But if earnings continue to recover, I think the current price could offer good value. If I wanted to add TalkTalk to my portfolio, I’d certainly consider buying after today’s results.

Powering up for growth?

Temporary power solutions provider Aggreko (LSE: AGK) is another firm that’s been through a long decline. This company rents out generators to provide power for large events and also operates in emerging markets, where it can provide additional grid power to meet growing demand for electricity.

The shares have fallen by about 65% since September 2012. However, Aggreko’s latest figures confirmed my view that this business is on the mend. The group’s underlying revenue rose by 8% to £1,760m while underlying pre-tax profit was 10% higher, at £182m.

I am generally cautious about companies’ underlying figures, which include adjustments designed to flatter profits. But I’m comfortable with Aggreko’s adjusted numbers. The only real changes relate to exchange rates and fuel costs, which are passed through to customers.

My calculations indicate that the firm’s operating profit margin rose from 10.8% to 12.4% last year. There were also improvements in free cash flow and underlying earnings. Analysts’ forecasts suggest modest growth in 2019 followed by bigger gains in 2020, when the company will provide power for the next Olympic Games.

The shares currently trade on 16 times 2019 forecast earnings, with a 3.4% dividend yield. I think this could be a decent entry point for long-term buyers.

The post Why I think now’s the time to buy these FTSE 250 stocks appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Could this be the start of further acquisition activity in the telecoms sector? As a result, could a FTSE 250 sector peer be worth a closer look?

A done deal?

But first, CityFibre. The board is recommending that shareholders accept the deal. Already Bidco has irrevocable undertakings and a letter of intent from 67.8% of shareholders in the company. As such, the chances of it being concluded seem to be relatively high, and it would represent an all-time high valuation for the business. As such, the prospect of investors who are set to make a profit from the deal deciding to vote against it seems relatively low.

Improving outlook

Alongside news of the bid approach, CityFibre also released its full-year results. They showed a rise in revenue of 126%, while gross profit moved 48.4% higher. During the period, it was able to deliver on a £201.8m fundraising which is being used to fund growth of the company’s full fibre network and to pay for the acquisition of Entanet.

However, the company’s net loss increased to £16.6m from £12.6m in the previous year. This shows that while it has the potential to become a highly profitable business in the long run, in the near term it may struggle to deliver a financially-appealing outlook. As such, the acquisition approach seems to be good news for the company’s investors.

Further bid activity?

Also operating within the telecoms sector is FTSE 250-listed Talktalk (LSE: TALK). The company has experienced a difficult period which has had a negative impact on its financial performance. However, it now seems to have found the right strategy under a refreshed leadership team, with the company’s bottom line forecast to rise by 62% in the current year and by a further 20% next year.

Despite such a strong rate of growth, Talktalk trades on a price-to-earnings growth (PEG) ratio of just 0.9. This suggests that it could offer growth at a reasonable price. And since dividends per share are expected to increase by 78% next year, it appears as though the company is optimistic about its investment outlook.

Certainly, the UK quad-play sector is becoming increasingly crowded and remains highly competitive. But with a strong position and the potential for further growth due to its focus on efficiency and customer service, it would be unsurprising for the company to become a takeover target over the medium term.

The post CityFibre surges 90% on bid approach: could this FTSE 250 peer be next? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of TalkTalk Telecom Group plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Talking profits, dividends and debt

TalkTalk said full-year earnings before interest, tax, depreciation and amortisation (EBITDA) would now be between £230m and £245m, down from the £270m to £300m it had guided on in November.

After paying a dividend of 10.29p last year, the board is “temporarily” cutting the payout to 2.5p per annum, before moving to a base of 7.5p “when leverage is reduced to 2 times EBITDA.”

TalkTalk had net debt of £837m at the last reckoning. The fundraising of up to £200m will reduce debt by £100m, with the other £100m earmarked for a 20% stake in a new joint venture with Infracapital to provide full fibre to more than 3m homes and businesses. I make the pro forma leverage 3.1 tines EBITDA, so I reckon the 2.5p dividend could be around for at least a couple of years — even if things go well.

Difference of opinion

Ahead of today’s update analysts were somewhat divided on the company’s prospects. Exane BNP Paribas argued that the company, which reset its strategy last year, is struggling to compete at the value end of the market. It expected a dividend cut and slapped a 90p price target on the shares. RBC thought concerns about the company were overdone and upgraded the stock to ‘outperform’, albeit lowering its price target to 150p from 190p.

The shares have regained some ground since early morning and are currently trading 10% down at 108p, which gives a dividend yield of 2.3%. I lean more towards the Exane view of TalkTalk’s business prospects and with the dividend also slashed, I rate the stock a ‘sell’.

Turnaround saga

Saga (LSE: SAGA) is another FTSE 250 company whose strategy is looking shaky, after it issued a profit warning in December. The collapse of Monarch Airlines was part of the reason, but a sharp deterioration in its insurance broking business (55% of group profit) is more worrying.

Management is confident of turning the business round. Indeed, despite net debt of £460m and leverage of 1.8 times EBITDA at the last half-year end, the board said it remains fully committed to continuing its progressive dividend policy.

However, some analysts question whether Saga’s broking issues are more structural and if we’re looking at an ex-growth business, while a dividend yield of 7.6% at a current share price of 117p suggests the market isn’t entirely convinced the payout is safe.

I share the concerns of the doubtful analysts about the broking business and the market’s concerns about the dividend. And bearing in mind the old adage that profit warnings come in threes, I’m avoiding Saga at this stage. I’d rather pay a bit more for the shares later if the company can demonstrate a turnaround is beginning to happen.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

What I didn’t see was any clear long-term strategy, and rather than a joined-up global giant, it seemed to me that I was looking at a rag-tag bundle of individual country telecoms firms with little in common.

Neil Woodford, it appears, had been having similar thoughts, having said that “over the last few years, we have had concerns about Vodafone’s strategic focus“. But that was after he had just bought some shares in May for his Income Focus fund, and he went on to say that a meeting with Vodafone’s finance director convinced him there’s now “a much clearer strategy for the business.”

Time to buy?

The share price has been stagnating for a while, and at 229p it’s lost 8% since early 2014. Forecasts for the year to March 2019 should drop the P/E to around 25 — still high, but I’m increasingly thinking there are good long-term prospects here.

Though the short term is not too important right now, Vodafone’s Q1 update revealed 2.2% organic service growth, with sustained data growth of 63%, and strong performances across Europe — though overall revenue did drop by 3.3%.

Mooted dividend yields of 5.7% are nowhere near covered by earnings. That seems a bit mad to me and I’ve no idea of the reason for it, but I’m less concerned now that Mr Woodford wants it in his income portfolio.

Mergers in the future? Increasingly closer ties with Liberty Global are looking like a good prospect.

In from the cold

I’m starting to warm to Talktalk Telecom Group (LSE: TALK) too. We were all shocked by the security breach in 2015, with details of around 150,000 customers accessed by hackers — and the market sent Talktalk’s shares plunging.

But investing memories can be short, and since December 2016 we’ve seen a 19% rise to 183p.

Earnings have been growing impressively since 2014, and based on forecasts for the next two years we’d be looking at a P/E of a very modest 14 by March 2019. On top of that, Talktalk’s predicted dividend yields are close to Vodafone’s at around 5.5%, with the important difference that they’d be about 1.3 times covered by earnings.

Good start

A trading update on Wednesday told us of continuing strong demand for the company’s Fixed Low Price Plans (FLPP), with the total number of FLPP customers reaching 1.3m. That suggests there’s big demand for simpler lower-price connectivity and we’re not all after “as much data as you can eat“. My own broadband was recently upgraded from 100Mbps to 150Mbps, which makes no difference whatsoever for my kind of usage.

The reported “continued strong growth” in business-to-business service offered a sign that the hacking fallout is hopefully over, as I’d expect business customers to be more wary of security risks.

The company has reiterated its full-year guidance for EBITDA of between £270m and £300m. We should have a flat earnings year this time with growth coming next year, so I’m not getting too excited by that yet — but it is quietly encouraging.

All in all, I see confidence returning with the share price apparently lagging behind. Talktalk shares look nicely priced to me.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Strong performance

Updating the market on Wednesday regarding its quarterly performance was Talktalk (LSE: TALK). The company’s outlook for the full year has remained unchanged, with it performing as expected in the three months to 30 June. For example, it saw good growth in the on-net base, with customer numbers rising by 20,000 versus a fall of 9,000 in the first quarter of the prior year.

This was made up pf growth in both its Consumer and Wholesale divisions. In Consumer, there was further strong demand for the company’s Fixed Low Price Plans, with new acquisition activity and re-contracting driving the total number of customers on the plan to 1.3m. The growing in-contract base is continuing to contribute to improvements in the company’s churn rate, with early life churn from customers signed up to the pricing plans significantly lower than in previous year. This suggests that Talktalk may enjoy higher repeat business and more stable financial performance in future.

In terms of its growth outlook, Talktalk is forecast to record a rise in its bottom line of 23% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.7, which suggests that they may offer high growth potential at a reasonable price. With a sound strategy and a wide margin of safety, now may be the right time to buy a slice of the business.

Upbeat outlook

Also offering upside potential at present is international corporate services company Hogg Robinson (LSE: HRG). Its track record of growth is somewhat mixed, with its bottom line having been relatively volatile in recent years. This trend is set to continue, with a fall of 10% due this year. However, this is forecast to be followed with a bottom line growth of 15% next year.

The market seems to have factored in Hogg Robinson’s volatile earnings outlook. It trades on a PEG ratio of just 0.5, which suggests a wide margin of safety is on offer. If the company is able to deliver financial performance which is in line with its forecasts, it may see its valuation rise because investors seem to be pricing in a downgrade to at least some extent.

As well as growth potential, Hogg Robinson has a dividend yield of 4% from a payout which is covered 2.5 times by profit. This suggests dividend growth could be high, which may make it an enticing income stock over the long run.

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Peter Stephens owns shares of Talktalk.

This move appears to have surprised the market, but I believe a dividend cut has been overdue for some time. TalkTalk’s earnings have not covered its dividend payout since 2014, during which time net debt has ballooned from £497m to £782m.

As I’ve commented previously, this month’s boardroom reshuffle was always likely to be the trigger for a cut. Chief executive Dido Harding has been replaced by Carphone Warehouse founder Charles Dunstone, who will serve as executive chairman, and former TalkTalk Consumer boss Tristia Harrison, who will be chief executive.

Time to buy TalkTalk?

Will today’s dividend cut and Mr Dunstone’s arrival mark a turning point for TalkTalk?

Dunstone said today that his priorities will be growth, cash generation and profit. TalkTalk’s 2016/17 results suggest to me that the firm’s performance is already moving in the right direction.

The group reported a net addition of 22,000 new customers during the fourth quarter, after a period of decline. Although revenue fell by 3% to £1,783m last year, adjusted operating profit rose from £131m to £165m. The group’s underlying free cash flow improved from £82m to £110m.

The only fly in the ointment was net debt, which rose from £679m to £782m last year. That’s too high for a company with pre-tax profits of £70m, in my view. However, I expect a steady reduction in borrowings, now that the dividend has been cut to a level at which it should be covered by free cash flow.

Looking ahead, TalkTalk trades on a 2017/18 forecast P/E of 11.5, with a prospective yield of 4.6%. This stock has gone onto my watch list as a potential turnaround buy.

This 6.5% yield looks tempting

Not all turnaround situations require a dividend cut. Management at department store group Debenhams (LSE: DEB) has so far been able to reduce debt levels and maintain the dividend.

As a result, Debenhams now offers a prospective dividend yield of 6.5%. Reassuringly, last year’s payout was covered by both earnings and free cash flow. However, a further decline in sales is forecast for the current year.

The group’s challenge is to make its stores a destination for shoppers, while supporting online growth. Plans are underway for a greater emphasis on beauty, food and drink, designer clothing and accessories like footwear and lingerie. These are intended to attract what the firm describes as “social shoppers”, and to sit alongside an improved internet offering.

It’s not clear to me how much growth potential Debenhams has. But it may be worth noting that while UK like-for-like sales only rose by 0.5% during the first half, online sales rose by 64%. This suggests to me that there’s an opportunity to expand online.

Debenhams stock currently trades on a 2016/17 forecast P/E of 7.9, with a well-covered dividend yield of 6.5%. At this level, I think it’s worth considering as a value buy.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Potential challenges

BT faces a highly competitive industry outlook. A number of major rivals have sought to diversify their operations and differentiate their products from the competition. BT has done the same and has purchased EE in order to become a major quad-play operator. This means that it offers broadband, pay-TV, landline and mobile services. While it did offer all four services prior to the EE deal, the acquisition of the UK’s largest mobile network means that it is now a dominant quad-play operator.

However, the risks involved with integrating such a major business into BT may have been overlooked by investors. The EE deal meant that a major reorganisation was necessary. While it is apparently progressing as planned, there is a chance there could be a disappointment when it comes to cross-selling, or in how the different parts of the business interact with one another. Generating efficiencies can also prove to be more challenging and at a time when BT’s management team is already focused on the Openreach deal as well as the Italian investigation, the integration of EE could suffer.

BT also faces a large bill in order to maintain its commitment to sports rights. Sky is showing little sign of pulling back on its investment in football and other sports rights. Therefore, the cost to BT of keeping up with the competition could be significant. This may mean that investment in other parts of its business suffers, or else prices may have to rise. This could make it less competitive relative to its rivals and lead to slower profit growth.

Risk/reward opportunities

As well as operational risks, the company faces financial risks. Its pension obligations remain vast and its debt levels may also cause issues should interest rates rise over the medium term. With a debt-to-equity ratio of 137% and a pension liability of almost £6.4bn, BT’s balance sheet remains highly leveraged and relatively risky. And with its bottom line due to rise by just 3% next year and 5% the year after, its price-to-earnings growth (PEG) ratio of 2.4 lacks appeal given the risks it faces over the long run.

Due to this, sector peer Talktalk (LSE: TALK) seems to be a better option for investors. It is forecast to record a rise in its bottom line of 8% next year and 10% the year after. This puts it on a PEG ratio of just 1.1, which indicates its shares could deliver high capital gains. Certainly, Talktalk has endured a difficult period, with the hacking scandal hurting investor sentiment. However, with a new CEO likely to refresh its strategy and a true quad-play offering which offers cross-selling potential, it appears to be a better buy than BT.

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With this in mind, here are three beaten-down shares that I’m avoiding at the moment.

Dividend cut risk

First up is telecoms company Talktalk (LSE: TALK). The company’s share price has fallen by 19% over the past year, which compares unfavourably to the UK FTSE All-Share Index’s gain of 24%.

Talktalk has struggled to shake off the damage caused by the high-profile hacking scandal in 2015, and in order to win back customers, management has decided to rebrand the business. Talktalk is returning to its challenger roots by focusing on delivering value for money for its customers and keeping prices down. Signs of success are beginning to show too, with its churn rate falling to less than half the levels seen last year.

But looking forward, Talktalk faces margin pressure from higher costs due to rising investment needs and hikes in BT Openreach wholesale charges. Because of Talktalk’s more limited size and its new Fixed Low Price Plans, the company seems be in a weaker position than its rivals.

Moreover, Talktalk’s dividend policy seems unsustainable as city analysts expect its dividend cover to fall short of 0.7x this year. This indicates a dividend cut is likely to take place soon, and the risk of this happening will likely continue to weigh on Talktalk’s share price.

Difficult trading

Defence supplier Cobham (LSE: COB) isn’t doing any better. The company’s share price fell by 15% today after yet another profit warning — its fifth in the past 12 months.

Cobham said it now expects underlying trading profit for 2016 to be £225m, which represents a further reduction of £20m from its January guidance of £245m. It’s also well below the estimate of £290m from only three months ago.

There’s mounting uncertainty about its troubled contract with Boeing’s KC-46 tanker programme, and there is growing concern that Cobham may need another equity raise before long.

“The balance sheet is clearly not strong enough to properly support the operations of the group,” the company said in its press release today.

Regulatory risks

Shares in CFD provider Plus500 (LSE: PLUS) have barely recovered since the FCA announced plans to clamp down on the contracts for difference market in December.

New regulations could pose a bigger challenge for Plus500 than its larger rivals as regulation tends to hit smaller firms the hardest. Proposed changes to make it more difficult for Plus500 to acquire new customers and restrictions on marketing would have a greater impact on the company as it has relatively high churn rates.

Shares in Plus500 currently trade at eight times forward earnings this year. That doesn’t seem too demanding, but given expectations that profits will fall sharply under the proposed new regulations, I’m avoiding its shares for now.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Italian scandal

Why do I think so? Up until a year ago the FTSE 100 stalwart had been performing remarkably well in my opinion, delivering steady earnings growth every year since 2002, with the exception of 2009 when the world was still reeling from the effects of the global financial crisis. BT’s shares were performing quite well too, climbing to 14-year highs of 500p by the end of 2015.

Of course, since then, the picture hasn’t looked so strong. Concerns over the group’s pension deficit, and its wrangling with Ofcom over the position of its Openreach infrastructure division have weighed on the shares. This has resulted in the telecoms giant suffering a share price slide that saw its shares drop from 500p to 382.55p in little over a year.

That was the closing price on 23 January. But within 24 hours the group had shed a further 21% of its market value as the company issued a profit warning due to an accounting scandal in its Italian business becoming larger than expected, as well as a gloomier outlook for UK public sector spending.

Worth hanging on

An investigation into accounting practices in the firm’s Italian business had discovered that earnings had been overstated for several years, forcing the group to more than triple its original writedown assessment of £145m to around £530m. BT now expects revenue to remain broadly flat over the medium term, but management remains committed to increasing the dividend by 10% for the next two years. The market has already taken a very dim view of the scandal, with the share price now at three-year lows and just managing to keep its head above 300p.

As I said, I do think the reaction is overdone. Granted, the City is expecting profits to shrink this year, but with the forward P/E ratio at 11 and a return to growth forecast for 2018/19, I think the bad news is already in the price. I certainly don’t think shareholders should panic and ditch their holdings just yet. With an inflated dividend yield now at 5%, it could be worth hanging on for a long-term recovery.

Unmissible income play

Another telecoms firm whose share price has been battered in recent times is BT’s mid-cap rival TalkTalk Telecom (LSE: TALK). In a trading statement last week the FTSE 250 firm revealed that since launching its new fixed low price plans in early October, re-contracting rates in the third quarter had been stronger than expected.

The company remains on track to deliver lower churn rates and positive net additions in the final quarter of the current financial year to March. With double-digit earnings growth forecast for the next three years, and a massive 8.9% dividend yield in prospect, TalkTalk Telecom remains an unmissable income play, I believe.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

A difficult period

Harding’s reign as Talktalk CEO has been rather mixed. On the one hand, she helped develop the company’s offering so that it has become one of the major quad-play operators. It has significant long-term growth potential due to its value proposition and relatively high flexibility in price plans compared to rivals. Furthermore, investment in its operations has created a more efficient business which is capable of delivering high profit growth in future years.

However, the company’s recent past has been negatively impacted by the hacking scandal. This severely weakened its share price and caused investor sentiment to remain low. Customer confidence in the business also took a hit and it could be argued that it has never truly recovered. As such, the change in CEO could be welcomed by the market through a higher share price in future months.

Contrasting fortunes

Today’s Q3 update from Talktalk is very different to that released recently by sector peer BT. The latter issued a profit warning thanks to problems with its Italian business. It will be investigated by Italian authorities and that’s likely to act as a drag on performance over the next couple of years.

Therefore, it seems relatively likely that BT’s share price will be held back to at least some degree by disappointing performance in one division. Coupled with this is a difficult outlook for the business in any case, since it’s seeking to integrate EE and manage possible changes at Openreach. Therefore, its outlook is uncertain.

In contrast to this, today’s update from Talktalk shows it’s performing as expected. Its revenue is around 5% lower than in the same quarter of the previous year, but this was anticipated since it has rolled out a number of lower priced plans. Looking ahead, it’s forecast to record a rise in earnings of 10% next year and 13% the year after. This puts it on a price-to-earnings growth (PEG) ratio of just 0.8, which indicates that its shares offer significant upside.

Of course, senior management changes always bring a degree of uncertainty. However, in Talktalk’s case it could represent a shift in investor sentiment and a feeling that the company will be allowed to move on from the hacking scandal. Although the current CEO has done a sound job overall, Talktalk could deliver improved performance in future. Given BT’s uncertain outlook, this suggests it’s a better buy than its industry peer.

The post Is Talktalk Telecom Group plc a better buy than BT Group plc after CEO resigns? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of TalkTalk Telecom Group plc. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.