BT Group PLC’s (LON:BT.A) valuation provides a compelling argument to buy the shares but the telecoms giant's consumer division is under pressure and there is uncertainty over the planned roll out of fibre broadband, Barclays said.
Barclays maintained an ‘equal weight’ rating and target price of 240p on BT after the company reported mixed results for the first quarter.
The bank said the most compelling argument for buying BT shares appears to be valuation.
“With the stock on an estimated 8%+ dividend yield and 5.5% unlevered free cash flow yield, this appears compelling,” it said.
“However, there is clear pressure in consumer, which threatens future earnings power, and the company cannot/will not give clarity on the outlook for the fibre to the home (FTTH) rollout and associated capital expenditure/dividend.
“As such the valuation argument is unlikely to play out near term, in our view, as we remain equal weight, 240p price target.”
In the three months to the end of June, profit before tax fell to £642mln from £704mln a year ago and revenue edged down 1% to £5.6mln.
Consumer arm hit by fierce competition
The consumer division was below expectations, with mobile average revenue per user (ARPU) down sharply and fixed line flat, with the company blaming tough competition.
Barclays said the decline in APRU was “largely regulation-driven but headwinds are unlikely to abate near term and management accept that maintaining a 5G premium will be challenging, whilst aggressive retail competition remains (competitors are not pricing 5G at a premium)”.
On fixed line, the bank pointed out that BT continues to lose market share. Having previously signalled a “value over volume” strategy, BT now accepts it may need to compete more on price to defend its position, Barclays said.
Fibre roll-out uncertainty
BT’s normalised cash flow in the quarter was down 36% year-on-year to £323mln as capital investment increased 11% to £931mln on the back of its investment in the planned roll out of high-speed broadband across the UK.
The firm aims to roll out fibre to 15mln premises by mid-2020 if the government and regulator Ofcom takes decisive action for the company to make a fair return.
Prime Minister Boris Johnson wants Britain to complete full-fibre coverage to all homes and businesses by 2033 but BT has said this was “laughably unambitious”.
Barclays said until BT gets clarity from key stakeholders, including the government and Ofcom, it cannot commit to its targets and therefore cannot give an indication of investment and dividend levels.
“We see positives from accelerating FTTH and see co-financing with service providers as the best way to preserve/create value, given the ever increasing AltNet FTTH build plans.”
Barclays assumes a dividend cut for next year, which implies a yield of 6.1%.