Shares in the telecoms and broadband services supplier TalkTalk (TALK) are tanking on Wednesday, yet the company has officially announced nothing. What is going on?
As of 10.30am, the stock has slumped more than 10%, or 13.5p, to trade at 117.2p. That’s a five-year low, and at a stroke wipes around £125m off the company’s market value on Tuesday of £1.25bn.
While there is an absence of news today we do know that TalkTalk is due to report a third quarter update next week (Thursday, 8 February) for the three months to 31 December.
Reading between the lines, it appears that investors are getting very nervous about recent trading.
ROCK AND A HARD PLACE
Remember, this is a company that last year was forced to slash its’ ‘too good to be true’ dividend in half as it continued to struggle in a cut-throat market.
On the one hand it is finding subscriber growth hard to come by in its core ‘value’end of the broadband and calls market. On the other, a long history of poor customer service means it continues to haemorrhage customers to rivals.
This led to a return of founder Charles Dunstone as executive chairman. He unveiled plans to put growth at the top of TalkTalk’s ‘to do’ list, with a keen key on cash generation and profits too.
It has led to the company ditching its mobile business, offloaded to O2.
MARKET REMAINS DUBIOUS
In December analysts at broker Jefferies had this to say about the company:
‘New tariffs are not delivering churn reduction as hoped, diluting EBITDA/FCF growth prospects. We remain heavily below consensus and expect TalkTalk to miss EBITDA guidance.’
EBITDA and FCF are City-speak terms for earnings before items like interest and tax as well as accounting adjustments depreciation and amortisation, and free cash flow.
Just a couple of weeks before that analysts at Numis Securities gave a detailed explanation of why they believed then that shares in the company were ‘still expensive even with the benefit of the doubt.’
WHAT THE MARKET EXPECTS
There are no available forecasts for the third quarter but consensus for the full year to 31 March 2018 currently stands at £262m of EBITDA and £91.8m of pre-tax profit, on £1.73bn of revenue.
If that proves to be the case it implies a more than £40m drop in pre-tax profit (30%) on a 3% or so decline on the top line.
One brief note of hope may eventually come on the takeover front. Shares notes that at the end of December Toscafund upped its stake in TalkTalk from 5.09% to 10.46%.
Toscafund is an activist investor that has been doing a lot of merger work in the UK telecoms space over the past few years. Perhaps it thinks it could do a better job than current management.
