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TalkTalk in price war with Vodafone and BT Group, analysts warn

Published: 11:25 09 Feb 2018 GMT

TalkTalk
TalkTalk plans to roll out fibre broadband to UK homes but so does BT and Vodafone

Talktalk Telecom Group PLC’s (LON:TALK) faces heightened competition from the likes of BT Group plc (LON:BT.A) and Vodafone Group PLC (LON:VOD) despite a return to customer growth, according to analysts.

The broadband provider on Thursday revealed it added 37,000 customers in the third quarter to December 31.

READ: TalkTalk slumps as it cuts earnings forecast and unveils fibre broadband roll-out deal

However, Goldman Sachs said TalkTalk’s current momentum subscriber numbers is likely due to price hikes by rivals BT and Vodafone and expects a slowdown in 2019 amid tough competition.

Goldman repeated a ‘sell’ rating on the stock and cut its target price to 100p from 130p.

TalkTalk's fibre broadband deal 

In TalkTalk’s third quarter trading update, it also announced plans to roll out ultrafast broadband to more than three million homes and businesses over the next three to five years.  

The company has signed a heads of terms agreement with Infracapital, the infrastructure equity investment arm of M&G Prudential, to create a joint venture to build a network of fibre cables that would allow much higher broadband speeds.

The project is expected to cost £1.5bn with TalkTalk contributing 20% (and Infracapital putting in the rest).

In support of the investment, TalkTalk launched a £200mln equity placing on Thursday.

“The placing of new equity brings some near-term balance sheet relief, but we estimate that given continued cash outflows in FY18/19, leverage will only fall to c.2.8x by end of FY19 (vs. our prior estimate of 3.2x),” Goldman said.

TalkTalk's earnings forecast 'reliant on Ofcom price cuts'

On the back of its fibre broadband plans and the higher cost associated with its return to subscriber growth, TalkTalk lowered its full year earnings estimate and reduced its dividend for the second time in a year.

Goldman reckons the earnings guidance in 2019 is reliant on wholesale price cuts by Ofcom and cost cuts. The bank also lowered its free cash flow estimate by 30% to reflect the fibre-to-the-premises (FTTP) investment.

Wrong time to give up on TalkTalk, says RBC Capital

Analysts at RBC Capital said TalkTalk’s latest profit warning and equity placing are “painful but not terminal”.

“With its subscriber dynamics now better understood and wholesale fibre costs about to fall we feel it is the wrong time to give up on Talk especially given the new FTTH (fibre-to-the-home) opportunity,” it said.

RBC left its rating on the stock at ‘outperform’ but cut its target price to 140p from 150p.

READ: BT's Openreach to connect fibre broadband into 3mln premises by 2020

It believes the main drivers of falling profits over the last couple of years are higher subscriber acquisition costs, lower average revenue per user (ARPU) due to price competition and an increase in fibre costs.

“With the subscriber trajectory now clearer, ARPU stabilising and fibre take-up known, profitability should be more stable.”

Fibre investment 'high risk' if Sky chooses another provider

Numis placed TalkTalk ‘under review’ after a previous rating of ‘reduce’.

The broker thinks the announcement of the TalkTalk and M&G joint venture “seems unlikely to become much more than a press release for a few quarters yet”.

“We worry that TALK/M&G are underestimating costs and rollout speed,” it added.

“We will worry much more if Sky PLC (LON:SKY) does not wholesale the TALK/M&G network.”

READ: Vodafone takes aim at BT through lightning fast telecoms network deal with CityFibre

Sky could decide to use BT’s Openreach network or Vodafone for fibre broadband.

Vodafone has announced a tie-up with CityFibre to build a new ultra-fast broadband network for 5mln homes and businesses and BT has pledged to connect fibre into three million premises.

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