It's been awful performer for some years, but TalkTalk shares may have bottomed out. Lee Wild runs through the thinking behind this potential recovery play.
We discussed TalkTalk as an "intriguing" potential turnaround play following full-year results in May, but concluded then that competition from industry big boys - , and
The shares fell from 122p to a multi-month low of 96p late June but, despite little benefit from first-quarter results last month, there has been buying interest through August.
Today, following bullish chatter from analysts at Barclays, the share price is up 8% and back to levels not seen since those May results. It's also an area of technical resistance, so question now is whether TalkTalk has what it takes to make a chart breakout stick.
Barclays analyst Maurice Patrick has just upgraded his stance on TalkTalk shares to 'overweight' Thursday with price target of 150p, implying 13% potential upside from the current share price.
"We believe operating trends are set to improve," reckon Barclays. "We see challengers set to fight back, with tailwinds from alternative fibre providers and incumbents set to take a more rational approach to retail⁄wholesale pricing."
But TalkTalk is currently one of the least preferred telecoms companies in Europe among analysts right now, trading at a discount to challenger peers on most valuation metrics.
"TalkTalk has suffered market share losses in the past few years, negative earnings momentum, and rising leverage," explains Barclays. "However, 12 months on from its strategy ‘reset’, we see a return to top-line growth with our⁄consensus earnings estimates seeming to have bottomed."
"Our positive stance on TalkTalk is based on the company's ability to cut costs, to drive higher margins and hence cash flow. Also, we see upside from the company deploying a data MVNO [mobile virtual network operator] model."
Industry price activity is certainly supportive currently, with BT and Virgin Media set to increase prices by 4-5% next month, although Vodafone remains "very aggressive at the value end".
If this trade is going to work, the broker accepts that TalkTalk must keep growing total broadband customers and retail broadband customers, stabilise then grow average revenue per user (ARPU), and generate positive revenue growth and strong free cash flow.
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