The Swiss bank had hoped that the group, which recently agreed to a new 13-year funding plan for its pension scheme, would be able to maintain earnings at current levels but it now realises this is not going to happen following the recent reset to estimates.
It will take several quarters to restore investor confidence, UBS predicted, as it downgraded the stock to ‘buy’ from ‘neutral’ and lopped a quid off its 310p price target.
The lower price target is driven largely by the higher-than-expected pension deficit and lower estimates for Openreach, BT’s network arm that is now run on an arms-length basis.
UBS reckons regulatory effects are largely baked into current consensus earnings estimates while what it calls the capital expenditure (capex) “envelope” of £3.7bn a year gives the formerly state-owned company some flexibility for an acceleration in the roll-out of its fibre network.
“Nevertheless, our estimates assume EBITDA [underlying earnings] steps down to £7.3bn for FY-19 (guidance £7.3-7.4bn) and sees limited growth thereafter. Separately, we assume capex rises to £4.0bn pa longer-term as Openreach does more on FTTH [fibre to the home],” UBS said.
BT’s target savings of £1.5bn a year are significant and may yet prompt an upwards revision to earnings estimates over the longer-term, UBS speculated.
“However, for the time being, the net impact of savings is unclear. On capex, an increase can be justified if Openreach is allowed to make a return on its FTTH investment, but we factor in limited benefit for the time being and there will be further visibility when the government publishes its Future of Telecoms Infrastructure Review in the summer of 2018,” UBS noted.
Shares in BT were up 0.3% at 203.65p in late-morning trading.