Is TalkTalk crash overdone?

TalkTalk (TALK) investors have been whispering it quietly for some time, confident that a new management team has the broadband provider on the right track. Until today, that certainly seemed to be the case with TalkTalk’s share price outperforming the sector by 17% this year.

The turnaround plan, led by chairman and retail veteran Charles Dunstone, alongside new chief executive Tristia Harrison, has focused on TalkTalk’s credentials as a lower cost and affordable provider.

And, having moved on from that embarrassing and costly data breach in 2015, TalkTalk appears to be fighting back against BT (BT.A), Sky (SKY) and Vodafone (VOD), who had eaten into its share of the home broadband market.

So, is today’s profits warning merely a bump in the road in the longer-term recovery, or a sign of more fundamental issues for investors to worry about?

On the plus side, there was still plenty of reason for cheer in today’s update. TalkTalk added an impressive 46,000 new customers in the half year compared with the loss of 29,000 for the same period a year ago.

Churn rates are down to 1.3% from 1.5%, while nearly 40% of new customers in the second quarter chose its faster packages to leave TalkTalk with over one million fibre customers. The TV base returned to growth after seven quarters of decline, following changes to TalkTalk’s pricing structure and amid growing interest in its next generation YouView TV platform.

But targeting customer growth, as TalkTalk has done since May with its fixed low-price plans for phone, TV and broadband, has come at a cost to the bottom line.

Losses for the half year were £75 million, compared with a pre-tax profit of £30 million a year earlier, while ongoing planned investment means underlying earnings for full year cash profit will be towards the lower end of the guided range of £270-£300 million.

Harrison, who was previously head of TalkTalk Consumer, insists the short-term pain will be worthwhile if it means the company enters the following financial year with a materially higher quality, lower churning and larger customer base.

Deutsche Bank seems to agree as its analysts have maintained their ‘buy’ rating alongside a price target of 230p. The stock plunged as much as 17% Wednesday to 156p, its lowest since May.

Once among the market’s highest yielding stocks, TalkTalk cut its interim payout by more than half to 2.50p today, although it still expects to pay an unchanged full-year dividend of 5p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.