BT's Big Update Leaves Analysts Calling for Bolder Approach

(Bloomberg) -- Thursday’s triple-header of announcements from BT Group Plc did little to allay multiple concerns weighing on the stock.

While fourth-quarter results were broadly in line with estimates, an outlook for declining revenue, earnings and free cash flow was taken badly. A pension-funding plan and a strategy update with 13,000 job cuts weren’t enough to lift investors’ spirits, sending the shares down 10 percent to a six-year low.

Analysts questioned whether a targeted increase in network investment is enough to combat the threat from alternative providers, such as CityFibre Infrastructure Holdings Plc and Hyperoptic Ltd. With limited relief from pension payments, a flat dividend, questions on sports-rights spending and a lack of clarity on how much of the announced 1.5 billion-pound savings will trickle down to profit, the initial verdict was that more of the same isn’t enough.

Jefferies, Jerry Dellis

“We feared that today’s strategy update would be a missed opportunity to acknowledge overbuild threat and go bold on FTTP (Fiber to the Premises). That appears to be the case.”

Alternative network providers “threaten to chronically erode” Openreach’s wholesale broadband market share, and “weaken the prospect of Ofcom feeling the need to reach a ‘fair bet’ regulatory settlement with BT on full fiber.”

“New initiatives announced today appear to represent self-help measures that reinforce existing strategy rather than taking BT in a bolder new direction.”

Rating Hold, price target 215p

Morgan Stanley, Terence Tsui

Expect estimates to come down, yet “this is not the big reset that some had feared.”

Regarding BT’s policy to keep the dividend flat, consensus looked for 1%-2% growth, while some bears had expected a big cut.

No update on fiber targets to accompany the capex target, “the question going forward” is whether 3.7 billion pounds a year is enough to build out a fiber network fast enough.

No new details on consumer tariffs for bundled TV, broadband and mobile. These will “probably” be disclosed by the time of BT’s consumer briefing on May 17.

Rating Equal-weight, price target 290p

Raymond James, Stephane Beyazian

“A new cost savings plan has been launched, but without cuts in the costly media strategy, which we continue to believe is delivering mediocre commercial results.”

Commercial trends in the fourth quarter were “disappointing,” as was the outlook for earnings and cash flows.

Rating also factors in “necessary step-up in capex” for a faster fiber-to-the-home plan due to political pressure, in addition to further regulatory impacts and rising competition from Sky in mobile.

Rating Underperform

UBS, Polo Tang

While the initial reaction to the outlook may be negative, “there is visibility on overhangs that have weighed on the stock” in soccer rights and pension, while “significant new cost savings” suggest that this fiscal year “could be the low point for estimates”

The 1.5 billion pounds of annual cost savings are a gross number and it’s “unclear how much of this will fall to Ebitda and how much will be re-invested,” even if it does provide a cushion for longer-term estimates.

“Within the results, the positives were the rebound in EE profitability and consumer revenues returning to growth, but the main negative was ongoing weakness in global services.”

News on the pension deficit amount was “disappointing”

--With assistance from Lisa Pham

To contact the reporter on this story: Kasper Viita in London at kviita1@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Paul Jarvis

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