Berenberg has reiterated its 'buy' recommendation for BT Group PLC (LSE:BT.A), raising the price target to £1.35 per share from £1.33 with its optimistic outlook driven by projections of substantial increases in the company's free cash flow (FCF) over the coming years.
BT’s new normalised FCF guidance for 2024/25 is approximately £1.5 billion, which is 16% higher than the consensus estimate of £1.29 billion compiled by the company.
Looking further ahead, BT expects its FCF to rise to around £2 billion by 2026/27 and £3 billion by the end of the decade, significantly exceeding the Visible Alpha consensus of £2.07 billion for 2029/30.
Major push
Several key factors contribute to this optimistic forecast. A major 'push' is the expected decline in capital expenditures (capex).
BT’s investment is anticipated to drop by £1 billion annually after the company completes its fibre network expansion, which aims to cover 25 million premises by the end of 2026. This reduction is expected to boost BT's FCF as less money will be spent on long-term investments.
Additionally, BT is projected to cease the current £0.2 billion annual repayment of grants received under the Broadband Delivery UK (BDUK) programme.
BDUK is a government initiative aimed at providing superfast broadband to rural and remote areas of the United Kingdom. This cessation will further enhance BT's FCF.
The teclo's chief financial officer, Simon Lowth, emphasised that the building blocks of the company’s FCF improvement are within BT’s control.
Sharpened focus
This includes engineering efficiencies, a sharpened focus on the UK market, and stopping capex in areas where returns on investment are not promising. For example, BT plans to halt certain innovation projects that do not offer good returns in the foreseeable future.
The company's new CEO, Allison Kirkby, highlighted an expectation for earnings before interest, taxes, depreciation, and amortisation (EBITDA) to grow by approximately £0.1 billion annually.
Despite these positive projections, investors remain cautious. Telecom companies often face scepticism regarding their definitions of cash flow.
Berenberg noted that, beyond BT’s definition of normalised FCF, there are restructuring costs, spectrum payments (related to the acquisition of wireless frequencies), and share repurchase costs that should be considered.
'Real' FCF will be lower
After accounting for these factors, Berenberg estimates the “real” FCF for BT to be around £0.8 billion in 2024/25, £1.3 billion in 2026/27, and £2.3 billion by 2029/30.
Moreover, BT announced a new £3 billion gross annual cost-savings plan to be achieved by March 2029 at a cost of £1 billion. This programme is part of BT's ongoing efforts to enhance efficiency and reduce expenses.
Looking ahead, BT expects some challenges, such as moderate increases in broadband losses due to a downturn in house-building and the cost-of-living crisis. However, the company sees potential for market growth to resume in the medium term, given the current 83%-84% fixed broadband penetration in the UK.
In late-morning trading the stock was flat at 132.85p.