Credit Suisse downgrades TalkTalk on structural headwinds

The bank pointed out that since the change of management and strategy, the shares have recovered 25% year-to-date, materially outperforming the European telecoms sector and trading on a significant premium.

"Whilst we agree with the renewed focus on core broadband, the stock has recovered to our previous target price of 210p, and we are now cutting longer-term forecasts as structural challenges are growing, and establishing a new target price."

Among the challenges facing the company, CS highlighted a material slowdown in growth in the UK broadband market over the last two years as UK household broadband penetration approaches 90%, which has coincided with deteriorating economic growth.

According to Credit Suisse, the slowdown in UK broadband market growth accelerated in the first half of 2017,with the market adding only 162,000 subscribers in the three months to the end of March and just 66,000 in the three months to the end of June. It attributed the slowdown to a deteriorating UK economy and fixed-to-mobile substitution.

In addition, it noted TalkTalk is exposed to the challenges from fibre-to-the-home. CS said the pressure on European telcos to invest in FTTH is growing as demand for speed rises, cost to build falls, financing becomes more available and government policy shifts to gigabits speeds.

"BT is now considering a 10m FTTH build which would favour those telcos willing to co-invest, and present a challenge to DSL unbundlers. TalkTalk already has thinner margins in the FTTc market than DSL, whilst margins available to TalkTalk in FTTH would likely be yet lower with Ofcom seeking to create investment incentives."

At 0925 BST, the shares were down 3.1% to 203.80p.