TalkTalk tumbles as Exane slashes price target, forecasts dividend cut

TalkTalk took a tumble on Wednesday as Exane BNP Paribas slashed its price target on the stock by 35% to 90p, saying the company’s commercial recovery looks set to stall this year, as it reduced its subscriber, revenue and EBITDA estimates and said it expects a dividend cut.

The bank said growth in the discount market has been a positive driver behind the group’s recent commercial improvement, but this is likely to be short lived as other operators are making bigger inroads into their value niche.

“Ultimately this means TalkTalk will, in our view, continue to disappoint on the revenue front, putting pressure on commercial spend, and ultimately leading to further disappointment on EBITDA.”

Exane cut its mid-term TalkTalk retail subscriber estimates by around 4%, resulting in medium-term revenue cuts of 1-2%. In turn, this translates into EBITDA cuts of around 3% for FY19, 6% for FY20 and 11% for FY21. Its revised estimates broadly call for flat adjusted EBITDA of between £265m and £270m over the next four years. TalkTalk’s current guidance for FY18 is for EBITDA towards the lower end of guidance of £270m to £300m.

Exane said its revised estimates are 10% below consensus by FY20.

Given its “increasingly bearish” view of TalkTalk’s financials and recent questions raised over the balance sheet, the bank now expects a 50% reduction in the dividend. It still assumes the FY18 guidance for 7.5p per share will be paid, but now sees a 50% cut in this dividend to 3.75p for FY19 and beyond. It expects to hear about this at the FY18 results.

Exane said it’s sceptical about the M&A case for TalkTalk and reckons any would-be acquirer would first need to see the shares below 90p for a sustained period of time before even considering a bid.

Finally, it said Vodafone’s growth and broadband strategy is placing “huge structural downward pressure” on returns in the discount end of the market, where ultimately TalkTalk is still over-earning.

At 1420 GMT, the shares were down 12% to 115p.