Telewest connects, but shares look expensive

TELEWEST, the cable group, yesterday displayed further evidence that it is finally realising the potential of its business that it has promised to for so long. But even this may not be enough to sustain its current share price.

Pre-tax losses deepened for the sixth consecutive year in the 12 months to December, rising to pounds 314m from pounds 310m. However, the market was more interested in Telewest's operating statistics, which generally showed an improvement.

In the cable television business, penetration increased by 1.9 percentage points to 23.8 per cent, while churn - the proportion of the customer base leaving the service - dropped to 29.5 per cent from 34.5 per cent. Telewest's telephony penetration also improved, up by almost 2 points to 30.5 per cent. However, churn also edged up, reflecting a determined campaign by British Telecom to win back former customers.

The figures show the benefits of Telewest's decision to stop digging up the roads in order to concentrate on signing up new customers. The company has introduced a cut-price package combining a basic set of television channels with a cheap telephone service. "It's a combination of good products and great value, and people are more reluctant to give those up," said Tony Illsley, the new chief executive.

Since his appointment in September Mr Illsley - a former chief executive of the Walkers Crisps snack foods group - has focused on improving service levels at the notoriously customer-unfriendly Telewest.

He points out that 94 per cent of calls to the company's customer service centre are now answered, compared to 82 per cent six months ago. The proportion answered within 30 seconds has also improved.

Telewest is gearing up to launch its digital television and high-speed Internet services in the fourth quarter of this year. For the first time, cable operators have an advantage over competitors such as British Sky Broadcasting and British Telecom because they alone have a high-speed network capable of sending and receiving large amounts of data.

Much rests on the ability of these new services to deliver extra revenues for Telewest in the future.

At the moment the City is reserving its judgement. "The evidence is now irrefutable that Mr Illsley has improved the consumer focus at Telewest," said Alan Lyons, telecoms analyst at ABN Amro. "Time will tell whether the statistics respond."

On current forecasts, however, Telewest's share price, which has doubled in the past year, looks expensive. On a ratio of enterprise value to earnings before interest, tax, depreciation and amortisation - a common valuation measure for telecoms stocks - Telewest is now more highly rated than Vodafone.

Few doubt the potential of cable, but Mr Illsley will find it hard to live up to that kind of expectation.