Broker tips: TalkTalk, Berkeley Group, Inmarsat
TalkTalk will be forced to cut its dividend payout next year in order to meet its debt covenants, analysts at Jefferies estimated.
In a research note sent to clients on Monday, they reiterated their 'underperform' stance on the shares and cut their target price from 125p to 95p after evidence that the firm's new tariffs weren't delivering the hoped for reduction in 'churn'.
However, they were diluting prospects for improved earnings before interest, taxes, depreciation and amortisation and free-cash-flows.
Contributing to the above was the ongoing competition for 'value' customers in a slowing market, making it difficult to pin-point what price-point was needed in order to retain customers, the analysts said.
Furthermore, Jefferies added: "a 2Q17/18 return to on-net rev growth benefited from the temporary tailwind of a double back-book price hike in the Aug-Sep comp. As the % of retail customers still on back-book plans diminishes, TALK's ability to punitively raise prices on them will erode. Meanwhile FLPP is still ARPU-dilutive. A year on from FLPP launch, TALK's plan is still an unconvincing experiment."
Hence, Jefferies concluded that on its below-consensus profit forecasts the firm would breach its debt covenants from fiscal year 2019/2020 if it maintained its dividend at 7.5p per share, going on to model a 40% cut to the divi next year.
Analysts at Canaccord Genuity stuck to their 'hold' recommendation on shares of homebuilder Berkeley Group, but revised their target price sharply higher given the outfit's multiple strong points.
Yes, the company was continuing to post "very strong" results, building out its strong forward sales position which had been built-up in a firm London market.
The analysts also lauded its "astute" land investments in the wake of the financial crisis, which were now producing good margins and returns.
"The bigger issue for the outlook is what demand and pricing will look like post FY2019 and what returns the group can deliver; an open question given the current political and macro uncertainty," the broker expalined.
The broker also noted how domestic customers of Berkeley were being more "circumspect".
Even so, the company possessed several advantages, including its "high quality" strategy, product, land bank, balance sheet and management of the cycle.
Hence the broker's decision to revise its target price higher, from 3,940p to 4,460p, albeit while sticking to a 'hold' recommendation.
Goldman Sachs has downgraded its stance on Inmarsat to 'neutral' from 'buy' and slashed the price target to 580p from 860p.
It noted that since being added to the Buy List in August 2016, the stock is down around 43% versus the FTSE World Europe up around 15%, driven by earnings downgrades as aero costs increased and revenue headwinds persisted.
The bank pointed out that Inmarsat is facing higher costs associated with building out its inflight connectivity business - now 1300 planes contracted - limited recovery in maritime and legacy declines.
"We continue to view the stock as a longer-term growth story given its exposure to growing segments in the satellite industry (aero, government and maritime).
"However, with capex remaining elevated through to 2020E as ISAT refreshes its satellite fleet, we expect limited free cash flow generation to continue to leave the dividend uncovered."