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TalkTalk tanks on dividend cut, profit warning, and £200m placing, but don’t forget its long-term turnaround (TALK)

Telecoms firm TalkTalk (LSE:TALK) delivered a triple whammy to investors this morning by cutting its dividend, issuing a profit warning, and launching a £200m fund raise. In an update for the last three months of 2017, the company said its EBITDA for full year 2018 is not expected to be between £230m-£245m, down from estimates in November of £270-£300.  This is quite a miss, but the big news is the planned placement.

As a result of this news TalkTalk has temporarily reduced its dividend to 2.5p a year, returning to a ‘normalised’ dividend of 7.5p when debt levels have been reduced to 2x EBITDA. The troubled FTSE 250 firm put its reduced earnings and dividend down to increased investment in growth.

Growth is the first stage of TalkTalk’s ongoing turnaround strategy under the watchful eye of founder Sir Charles Dunstone, who rejoined last February as executive chairman and is working alongside new chief executive Tristia Harrison.

However, the biggest piece of news today was that the company plans to raise up to £200m in a placing to invest in a network of fibre cables that will allow much higher broadband speeds. This will be carried out through a joint venture with Infracapital, the infrastructure equity investment arm of M&G Prudential. The collaboration will invest £1.5bn in providing the ultrafast broadband connections, with Infracaptial supplying 80pc of the funds and TalkTalk the remaining 20pc.

TalkTalk said that the number of placing shares to be issued could be up to 20pc of its existing issued share capital, a significant dilution for investors. Dunstone and other directors of the company plan to invest up to £40m in the placing. Despite Dunstone arguing that the investment will put the business ‘at the heart of Britain’s fibre future’, investors were understandably perturbed by the dilution in value and drop in prospects. Not even a drop in the number of customers leaving and a rise in new customers quarter-on-quarter could stop shares from falling by 10.5pc to 107p.

Where next?

TalkTalks’s shares have been in renewed decline since November 2017, when a half-year update revealed that the high, ongoing costs of its restructure had resulted in a hit to EBITDA for full-year 2018. The firm has been attempting to reposition itself as a low-cost operator through the use of more efficient outsourcing. This followed its collapse throughout the second half of 2015 and the whole of 2016 as it struggled to keep up in the broadband price war and suffered a massive security breach.

As we correctly pointed out last February, the appointment of Dunstone provided a catalyst for a turnaround in the firm’s share price. This led to strong price performance in the second half of 2017, with shares hitting as high as 216p in October, but that strength has now fallen off. There is a definite risk that expectations of Dunstone’s ability to turn the company around are too high, but change of this order doesn’t happen overnight, and the firm has already returned to quarter-on-quarter growth. TalkTalks’s plan for resetting its business has been split into growth, cash, and EBIDTA. With the company yet to pass the growth part of this plan, the key thing to look out for in its updates at the moment is the outlook segment.

In today’s update there is plenty to reassure investors here. Indeed, the company said:

‘Looking forward to FY19, we expect growth in Headline Group revenue, net adds growth consistent with FY18, stabilising ARPU and significant cost reduction as we continue to radically simplify the business. We expect EBITDA growth of 15%.’

What’s more, efforts to make large investments in transformational technology like fibre broadly show determination to create value for shareholders. For those who believe in TalkTalk’s ongoing turnaround story, and continue to feel that the worst is now behind the firm, this renewed weakness in the its share price could provide a good value opportunity over the longer term.

In afternoon trading on Thursday, TalkTalk reported that it had successfully raised around £200m after expenses in the placing. The company placed 190.6m shares in the capital of the company at 107p each, a 0.6pc discount to the mid-market price. When issued, these shares will represent around 19.95pc of TalkTalk’s existing share capital. Executive chairman Sir Charles Dunstone subscribed to a total of 32.7m placing shares, worth £35m, bringing his total stake in TalkTalk to 28.5pc. Chief executive Tristia Harrison subscribed to 279,671 shares, worth around £299,000, bringing her stake to 0.2pc.

Disclosure

Author: Daniel Flynn

The author of this piece does not own shares in the company mentioned.

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