Will BT Group PLC (LSE:BT.A) push through price hikes and face a backlash?
If it does shareholders could see a brief short-term boon and perhaps even an upgrade from City analysts eyeing improved earnings next, that’s according to Berenberg.
With the economy still in the depths of the cost of living crisis it's plainly going to be an awkward manoeuvre at best and, at worst, may prove politically incendiary.
BT may have other things to worry about than PR, however.
Berenberg analysts, in a note ahead of BT’s third quarter results, due in early February, suggested the upcoming financials will reveal the telecoms firm’s guidance to be in the balance.
“BT reports Q3 results on 2 February, which we believe will leave a lot for BT to do in Q4 to achieve full-year guidance,” Berenberg analyst Carl Murdock-Smith said.
In the meantime, the inflationary environment and the potential wiggle room for BT to squeeze a price hike will be a focus not just for management but for investors also.
The UK’s next inflation (ONS December CPI) measure comes out on Wednesday 18 January, and Berenberg reckons BT could go the next day to push through an inflation-linked price rise, though the bank’s analyst highlights the political risk of doing so.
“We expect [CPI] to be slightly lower than November’s 10.7%,” Murdock-Smith said. “We expect BT to communicate its April price increase the following day, which under BT’s CPI+3.9% pricing mechanism would be c 14%," which is a similar level that other industry observers have forecast.
“We believe that confirmation of the price increase would initially be taken positively for the share price and result in 2023/24 Consumer EBITDA consensus upgrades.
However, we worry about the political acceptability and medium-term sustainability of BT’s pricing mechanism, particularly given the Labour Party’s three-point telecoms plan – the party is currently well ahead in the polls," he added.
BT may well be walking either the tight-rope or the plank going into its quarterlies just over two weeks later, though Berenberg is not expecting things to get easier for the telecoms operator thereafter.
Murdock-Smith forecasts only a meagre 0.4% of year-on-year EBITDA growth for the quarter, which by his count would leave BT needing to hit the accelerator into the final quarter, as it would need a 5.5% bump in earnings to achieve its guided £7.9bn EBITDA.
It is, as the analyst tells it, sounding like a tall order for BT.
“BT will have to grow Q4 EBITDA by +5.5%, this despite the additional headwind of BT putting through an early £1,500 pay increase for employees from January 2023.
“We believe the guidance will be achieved, albeit possibly by the ‘EBITDA underpin’ in BT’s bonus scorecard being enacted, which we would view as low quality. Regardless, we expect investor doubts about BT’s guidance to increase after Q3," the Berenberg analyst said.
Far from pitching the FTSE 100 share to investors Murdoch-Smith says “debt is the problem”, seeing net debt some £500mln above consensus at £19.9bn, meanwhile, he described the current share price as “cheap on earnings, but expensive on cash flow”.
Berenberg has a ‘hold’ rating for BT with a price target of 160p, versus today’s market price of 119.7p.