Investors hung up on BT Group PLC (LON:BT.A) again today as the telecoms giant revealed that accounting issues at its Italian unit were much worse than initially feared, adding to a party-line of worry caused by ongoing UK regulatory issues, and the firm’s massive pension deficit.
BT chopped back its forecasts for this year and next as it more than trebled an estimated write-down on its Italian business to around £530mln, up from its £145mln initial forecast made in October.
The firm said an independent review of BT Italy, carried out by accountants KPMG, had found “a complex set of improper sales, purchase and leasing transactions”.
READ: BT Italy warning …
Mike van Dulken, Head of Research at Accendo Markets, pointed out that: “Last October’s suggestion of a £145m charge didn’t cause too many ripples as regulatory issues and a rising pension deficit hogged the headlines.”
But he added: “Today’s admission adds this to these nasty headwinds, especially as it could weigh on profits for the next two years. Even management isn’t sure what the final figure will be.
“The group still expects 10% dividend increases for the next two years but is this enough to appease disgruntled shareholders who had already been wearing a 20% downtrend since early 2016.”
BT shares continued to top the FTSE 100 fallers board in late morning trading, dropping almost 18%, or 68.05p to 314.50p.
Fear a driver …
Neil Wilson, senior market analyst at ETX Capital, said: “The problem is that investors will fear that this is not the end – what else will be uncovered? The costs could yet rise and that fear is driving the selling this morning.”
Jordan Hiscott, chief trader at ayondo markets, added: "Investigations are ongoing but it fills me with trepidation. Could this just be isolated to the Italian arm, or could this spread other parts of the business?”
BT also spooked investors with a cautious update in today’s announcement, saying “the outlook for UK public sector and international corporate markets has deteriorated”.
The group added: “For Business and Public Sector, this means we now expect a double-digit year on year percentage decline in Q4 underlying EBITDA adjusted for the acquisition of (mobile phones provider) EE.”
George Salmon, equity analyst at Hargreaves Lansdown noted that: “With news that its Business and Public Sector division is coming under pressure too, worries about the group’s ability to fund its generous dividend policy will surely grow.”
He added: “With the group’s net debts pushing £9.6bn following the acquisition of EE, and a review of the how to fund the £9.5bn pension deficit coming up in June, there were already a few jitters around the stock so this was the last thing the group needed.”
Haitong disappointed …
A long-time BT cheer-leader, John Karidis, analyst at Haitong Research said today’s news was “a bitter disappointment to us”.
He added that this was: “More so because, we think, these two issues are far from the most consequential drivers of BT’s share price at current levels: we think regulation and the pension deficit remain much more important determinants of BT’s net present value.”
Karidis said: “Based on our experience of BT and our work on the company to date, we think management has chosen to reflect the causes of today’s profit warning onto revised FY17 and FY18 guidance, but not the continuing good performance of other BT divisions (e.g. BT Consumer, EE and Openreach). As ever, BT always errs heavily on the side of caution.”
The analyst added that he has placed his rating, fair value estimate, and earnings forecasts for BT ‘under review’ ahead of the group’s third-quarter results, scheduled for release this Friday, January 27.