BT to get £700mln tailwind from recent price rises suggests broker21 Apr 2023 08:50
Proactive Investors - BT (LON:BT) fans need to be careful of getting ahead of themselves, according to Jefferies, which though a buyer says the telco still has plenty of challenges ahead.
Shares are up by 40% year-to-date, buoyed by CPI + price hikes across the UK market, better visibility on costs and new tax relief to protect free cash flow (and divis) through FTTP (fast fibre) build.
The US bank cautions, however, that annual results on 18 May will highlight wage negotiations resuming this summer and the risk of unquoted pension scheme assets being written down at the triennial review.
In view of these potential hurdles, BT would be well-advised to guide carefully, Jefferies suggests.
Even so, the CPI + price hike should "materially reinforce BT revenue growth over the next 12 months", with Jefferies estimating it is worth £700m even on the assumption that only a third sticks.
Also, following the Spring Budget allowing qualifying capex to be fully expensed for the three years to March 2026, so BT's cash flow is materially protected during peak FTTP roll-out (25m coverage target by Dec 2026), and there is now a useful safety margin around the dividend.
The bank expects BT to report a strong fourth quarter with underlying profit growth [EBITDA] growth picking up to +5.9% leading to a full-year total of £7.91bn on a statutory basis (guidance: at least £7.9bn).
Consensus estimates are below Jefferies's targets, but the broker believes these are too low.
Trends to watch will be Openreach’s FTTP net customer additions (JEFe: +321,000) and consumer losses (JEFe: -17,000 avg base decline vs -79,000 third quarter).
On the risk side, a triennial review gets underway post-30 June and BT's pension scheme holds £13bn of "unquoted, risky and potentially illiquid assets (PE, property, infrastructure)".
"Valuation is highly subjective and this issue is now squarely in focus".
Jefferies expects a modest 40% write down, adding £4bn to the net funding deficit with recovery extended beyond 2030 a likely solution.
Overall, the US bank raised its share price target to 200p, from 190p.
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