In quite possibly the most bearish upgrade note ever written, City broker Numis has lifted Talktalk Telecom Group PLC (LON:TALK) from ‘sell’ all the way to ‘reduce’.
The price target was moved the other way, too: from 90p to 85p. Hardly a ringing endorsement, is it?
Numis said it was only upgrading the stock because shares have fallen since its last research report was published. In fact, TalkTalk has lost a fifth of its value since the middle of May.
Ditching Daisy deal is bad news
On Friday, the telecoms group ditched plans to sell off its direct business-to-business (B2B) unit to Daisy Group, which analyst John Karidis reckons was because Daisy struggled to finance the acquisition rather than TalkTalk having a change of heart.
“Cancelling the sale of the direct B2B business is bad news, twice over,” wrote the analyst.
“TALK will now have to (i) forego the meaningful benefits this disposal would have brought, and (ii) mend fences with its direct B2B customers and the c.200 TALK employees (c.9% of the total workforce) that would have moved to Daisy.”
He has thrown the B2B business back into forecasts as well, which only really serves to boost the net debt-to-EBITDA ratio.
Rivals starting to lower prices
Of more concern are the wide challenges facing TalkTalk, says Karidis.
He notes that the company still competes mainly by undercutting its rivals, but the likes of BT Group plc (LON:BT.A), Sky PLC (LON:SKY) and Vodafone PLC (LON:VOD) are starting to respond with price cuts of their own.
As a result, we think TALK is sacrificing its ARPU [average revenue per user] to sustain line growth.”
The analyst is forecasting underlying earnings (EBITDA) of £229.6mln and £261.1mln this year and next, although he admits that the risk to these figures is “on the downside and material”. He adds that on a couple of metrics, TalkTalk shares are more expensive than those of its peers.
Shares are up 0.8% to 105.4p.