RBC has downgraded Talktalk Telecom Group PLC (LON:TALK) to ‘Sector Perform’ from ‘Outperform’, citing a BT Group plc (LON:BT.A) consumer strategy reboot and broadband undercutting by Vodafone Group PLC (LON:VOD) as catalysts for subscriber losses.
In a note to clients, analysts at the Canadian bank said a BT convergence focus was the key risk to TalkTalk, commenting: "Having stepped back from a converged strategy using an MVNO [mobile virtual network operator], we think TalkTalk is relatively defenceless against any aggressive BT bundling, which could lead to heavy subscriber losses.
"Having bought EE two years ago, BT can now capitalise on a convergence-first strategy. This is particularly appealing as BT's main fixed line competitors, TalkTalk, Sky and Virgin Media, do not have mobile networks.
“While all three have MVNOs (and TalkTalk is stepping back its MVMO), this does not offer any defence against data 'giveaways' as MVNO operators would need to pay for the additional capacity needed to match the offer.
“Our estimates suggest if BT were to move to an unlimited mobile data offering (or something similar) it could drive at least 300,000 broadband net adds away from other operators in the market through a combination of higher gross adds and lower churn. We believe this is a conservative assumption."
Increased BT retentions could push TalkTalk toward subscriber losses
The bank added: “BT has c.9.5mln broadband subs, with c.1.1 to 1.4mln disconnections per year (assuming a 12-15% churn rate). Our estimate of c.300,000 net adds in year would equate to between 21-26% of those disconnections being retained.
“The impact on TalkTalk would be clearly negative. Assuming it loses share in line with its 16% market share in broadband, this would imply c. 50,000 less subs in year 1, pushing it back towards net subscriber loss.”
RBC also cited TalkTalk’s pricing as an additional risk to its market share, commenting: “Although TalkTalk remains value-oriented it is not the cheapest with Vodafone undercutting it in both slow and fast fibre”.
The bank also lowered its target price for the operator to 125p from 140p.
TalkTalk shares were down 3.1% at 120.2p in early trading Friday