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Will The Hack Cause Talktalk Telecom Group PLC To Go Out Of Business?

The cyber-attack on Talktalk Telecom Group (LSE: TALK) last week was a disaster for the company. And the chaos that followed the attack did nothing to reassure Talktalk’s investors, customers or employees. 

In fact, almost all of Talktalk’s stakeholders were affected by the attack that put at risk the personal and financial details of millions of the company’s customers. 

Initially, Talktalk couldn’t establish the scale of the hack, and there were reports that some customers’ bank account had been emptied. However, over the past few days more news about the hack has emerged and, as it turns out, the data breach wasn’t as bad as initially thought. 

On Monday afternoon, officers from the Police Service of Northern Ireland with detectives from the Metropolitan Police Cyber Crime Unit arrested a 15-year-old boy in connection with the cyber-attack but this arrest has only led to more questions than answers. For example, how did such a young attacker manage to gain access to Talktalk’s data so easily? Some cyber experts have described the attack as relatively unsophisticated. 

For a company like Talktalk, which has already been the target of cyber criminals twice in the past year (excluding last week’s attack), the news that this was a relatively unsophisticated attack only compounds the company’s problems. 

Cutting corners

Talktalk is looking to cut £140m per annum out of its cost base by 2017 to fuel its growth ambitions. Before last week’s hack, City analysts believed that these cost savings would help the company increase earnings per share by 150%, to 21p by 2017. 

It’s more than likely that these forecasts will be revised lower over the next few weeks as exceptional costs from the hack are factored analysts’ figures. Moreover, the reputational damage from the hack could stunt Talktalk’s long-term growth. 

Indeed, Talktalk could be accused of cutting corners in customer security to meet its cost-cutting target. Would the attack have taken place if Talktalk had been spending more, not less, on its IT infrastructure? 

Whatever the answer to that question may be, Talktalk will be forced to spend more on its computer systems going forward. This may mean that the company will have to scrap its ambitious cost-0reduction programme. 

Losing customers 

With costs set to rise, Talktalk is now facing a double-whammy of rising costs and falling customer numbers. Negative press surrounding last week’s hack isn’t going to help convince new customers to join Talktalk, and the company will have to spend millions rebuilding its reputation.

Unfortunately, the group has always had trouble retaining customers; data shows that between 2009 and 2014 its retail market share had contracted by 9%.

Tough times ahead

Overall, the next few years are going to be tough going for Talktalk and City forecasts for growth are now redundant.

With this being the case, Talktalk’s shares look to be extremely overvalued at present levels. The company currently trades at a forward P/E of 19.6. With so much uncertainty surrounding the company, Talktalk doesn’t deserve this premium growth multiple in my opinion. 

However, before you make a trading decision, I strongly recommend that you do your own research -- you may come to a different conclusion.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.