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BT rallies as UBS keeps 'buy' rating despite 'disappointing' pension news

Published: 11:13 22 Jan 2018 GMT

BT
BT's pension deficit stood at £9.3bn on September 30

BT Group plc’s (LON:BT.A) bid to link pension payments to a lower measure of inflation has been rejected by the High Court but UBS believes all is not lost.

UBS maintained its ‘buy’ rating and target price of 330p on BT, saying there are differing levers to reduce the company’s pension deficit.

The telecoms giant last week revealed it had failed to gain court approval for its plan to switch the rate used to calculate its pension increases for 83,000 current and former workers from the retail price index (RPI) to the consumer price index (CPI).

READ: BT considers appeal on court ruling against plan to change index for pension rises

Since CPI is usually lower than RPI, the change would have helped BT to cut its pension deficit, which stood at £9.3bn on 30 September.

“We see the news as disappointing,” UBS said, adding that it had estimated the move could have reduced the pension deficit by up to £1.7bn.

That said, UBS think the shares were not pricing in much of a benefit from the proposed changes.

UBS estimates the actuarial pension deficit for BT is £6.5bn on a gross basis, compared to consensus forecasts of £11-12bn.

READ: Numis reiterates ‘buy’ rating on BT as it believes consensus forecasts are “likely to start climbing"

“Our lower deficit is driven by changes to mortality assumptions (-£3bn) and changes to indexation of benefits (-£1.7bn),” it said.

“While this disappointing outcome on indexation of benefits should theoretically increase our pension deficit, this could be offset from BT giving Pension Trustees a claim over certain assets and we currently factor in no benefit from this.”

UBS added that it believes concerns around the pension deficit, significant costs in securing Premier League broadcasting rights and capital expenditure for BT’s network arm Openreach upgrading the UK’s broadband infrastructure, were already priced into the shares.

BT offers an 8.8% calendarised equity free cash flow yield (EFCF) for 2018, including pension charges, UBS said. Excluding pension costs, the EFCF yield rises to 10.8%.

The dividend yield is 5.9%. 

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