Analysts concerned about TalkTalk's weak guidance

1st Feb 2019 12:46

(Sharecast News) - Analysts were impressed by third quarter customer numbers from telecommunications outfit TalkTalk but were concerned as full-year profit guidance was cut significantly below market consensus.For the full year, TalkTalk lowered its guidance for earnings before interest, tax, depreciation and amortisation by £10-15m for an IFRS 15 accounting adjustment to £245-250m, which does not include £5-10m of costs from the FibreNation joint venture.RBC Capital Markets noted that, the main "on-net" revenue metric was in line, although TalkTalk had missed on group revenues by 2% due to lower-margin carrier and voice revenues, while average revenue per user was weaker.Most importantly, RBC said the issue with TalkTalk's update was its earnings guidance - which was significantly below consensus estimates of £258m.RBC kept its 'sector perform' and 125p target price on TalkTalk unchanged.Credit Suisse agreed it was a "strong" quarter customer growth for TalkTalk with TalkTalk, but missed its revenue estimate by 2.6% and lamented the cut to EBITDA guidance."While we believe TalkTalk has executed very well on subscriber growth over the past few quarters, we have seen the company miss our revenue forecasts for the past 3 quarters and its EBITDA guidance for FY19 has been cut again."The key question for us remains how much TalkTalk is discounting price and spending in acquisition costs to achieve this strong subscriber growth."Credit Suisse rates the shares 'underperform' views the company as "structurally challenged" due to rivals building fibre-to-the-home and the rising risk to DSL from mobile substitution. "TalkTalk's own fibre ambitions remain modest near-term and, in our view, it would need a well-funded partner to successfully build a material fibre footprint in the UK."Having joined in with the conference call, Morgan Stanley noted that management "were keen to highlight the positives around customer momentum", but analyst questions were more skeptical around higher leverage, with net debt expected to continue to trend at more than three times EBITDA."Management say they have more than enough dividend capacity (eg, from previous equity raise/ other sources), but this is topical because the dividend was only recently cut in Feb 2018."Morgan Stanley noted that there were higher restructuring costs of £25-30m to execute the simplification plan."Management say they are comfortable with FY20 EBITDA consensus estimates, but the market is understandably concerned given numerous downgrades in recent years (with the latest downgrade only this morning)."