Why these 2 shares could be unlikely recovery plays

2 mins. to read
Why these 2 shares could be unlikely recovery plays

The quad play sector has thus far been a mixed bag for TMT operators. While it was seen as a means of diversifying into new product areas and generating additional sales from cross-selling opportunities, for BT (LON:BT.A) and Talktalk (LON:TALK) it has been a different story.

Both companies have lagged the FTSE 100 over the last year by around 25-30%, with internal challenges meaning their near-term outlooks are relatively downbeat. However, with low valuations, sound strategies and income potential, both companies could offer recovery prospects in the long run.

Recent challenges

In recent months, both companies have experienced difficulties which have affected their operational performance. In the case of BT, it has seen challenges in its Italian division, where potential fraud has been identified. This caused a profit warning earlier in the year, with the company’s earnings forecasts for 2017 and 2018 now being lower than previous guidance.

with low valuations, sound strategies and income potential, both companies could offer recovery prospects in the long run

Similarly, Talktalk was the subject of a hacking scandal in 2015. This has had a negative impact on the company’s sales and reputation among customers; a trend which has continued in the following two years. However, even before the hacking scandal, the business had seen its share of the fixed broadband market decline from 20% to 13% between 2010 and 2015.

Time for change?

Clearly, both companies are experiencing a challenging period. While this may mean more risk, it could also mean higher rewards for investors. In Talktalk’s case, it has the potential to turn the corner as it now has a new management team. It was able to add a net 22,000 new customers in the most recent quarter, with the customer churn rate down to 1.45% from 1.6% a year earlier. While its recent dividend cut was initially unpopular among investors, it could allow greater reinvestment for growth, as well as help to reduce the company’s debt levels.

Similarly, BT is rumoured to be mulling the sale of its Italian division. Since it is loss-making, this could improve the company’s overall financial performance. In addition, potential synergies from the EE deal may not have yet been fully realised, while the company’s investment in sports rights may also pay off in the long run. It could establish the company as the dominant quad play operator in its key markets and lead to more robust margins versus sector peers. One further catalyst to improve the company’s financial performance could be the recent overhaul of its management team.

Investment potential

With the two companies having recorded double-digit share price falls in the last year, they now have relatively low valuations. BT has a P/E of 11, while Talktalk’s PEG ratio of 0.7 suggests it could also be undervalued. Even after its dividend cut, Talktalk still yields 4.7%, while BT has a yield of 4.9%. With inflation moving higher and the FTSE 100 close to a record high, recovery stocks could perform relatively well in future.

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