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BT to offset fibre investment costs with cut to pension liabilities, says Barclays

Barclays has repeated an 'overweight' rating and target price of 450p on BT
Barclays expects BT to provide clarity on pensions and fibre by May 2018

BT Group plc’s (LON:BT.A) plan to reduce its pension liabilities should offset rising expenditure on fibre investment and will continue to support current dividend payments, according to analysts at Barclays.

Last month, the company revealed that it would seek approval to switch the rate used to calculate its pension increases for about 80,000 members from the retail price index (RPI) to the lower consumer price index (CPI) in a High Court hearing late this year.

READ: BT Group faces higher capital expenditure and loss of wholesale customers, says Citigroup

“Recent moves indicate in our view a potential reduction in liabilities, and possibly also deficit repair payments,” Barclays said.

The bank a sees an improving pensions picture with changes to mortality assumptions. It also believes that using asset-backed partnerships could reduce the need for material near-term pension deficit repair payments.

On the BT’s plans to invest in fibre, Barclays has forecast capital expenditure will rise by 6%, or £200mln, in fiscal year 2019 and by 9%, or £300mln, in 2020.

“Offsetting this increase, we model higher wholesale fibre ARPU (average revenue per user) in later years. From a FCF (free cash flow) perspective this results in a 6% reduction in FY19E (fiscal year 2019 estimate).”

READ: Morgan Stanley thinks “dividend sustainability appears the main risk” currently for BT Group

Barclays expects BT to provide clarity on pensions and fibre by May 2018 when it publishes its full year results.

BT’s second quarter results in November this year are forecast to show a 5% decline in under lying earnings (EBITDA) as the group invests in the business and as regulatory headwinds and challenges at the  Global Services division persist, Barclays said.

Barclays repeated an ‘overweight’ rating and target price of 450p, saying it believes improving operational performance and continued cost-cutting can improve free cash flow generation at BT. 

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