BT Group PLC (LON:BT.A) shares may seem cheap, but analysts at JPMorgan Cazenove cut their price target as they see extra pressure from the coronavirus crisis and have found that most investors would “like to see” a dividend cut.
Previewing the telecom group’s full-year results on Thursday in the wake of news that the industry could see a merger of rivals o2 and Virgin Media, the investment bank told clients that the City consensus is “now primed for a material dividend and guidance cut”.
JPMorgan conducted a survey and said it found that 72% of investors would like to see a dividend cut, and most expect the level to be ‘rebased’ by 30-50%.
Analysts at the bank believe a reduction of at least 50% would be best in order to restore confidence in the sustainability of the dividend yield.
Showing their working, the analysts noted that revenues of around £22bn translate into roughly £7.7bn of underlying profit (EBITDA) and about £1.9bn in free cash flow, which would cover the circa-£1.5bn dividend, but the company needs to also cover net pension payments of around £700mln per year, ‘special items’ of £100-200mln per year and spending on mobile spectrum.
This all leaves debt steadily rising, “which seems unsustainable for a company with declining EBITDA and rising capital intensity”.
Previewing the Thursday’s results, the analysts said the effects of Covid-19, forward guidance as well as the dividend will be in focus.
The coronavirus pandemic is likely to create pressure on EU roaming, handset sales, TV and advertising revenues given the cancellation of live sport events, the business and global services division from future SME bankruptcies, as well as a highly competitive broadband market.
While all these risks seem largely discounted in the current share price, the analysts said the challenge remains one “trying to call the end of BT’s painfully long multi-year downgrade cycle”.
“Whilst valuation screens ‘cheap’, we believe bolder steps are required from management in order to restore investor confidence, and deliver the financial stabilization necessary to support a much hoped for share price re-rating.”
BT’s share price target was cut to 182p from 210p, though with the shares closing at just under 114p overnight, the rating remained ‘overweight’.
A day earlier, analysts flagged future danger for BT from reports that a merger is being planned of Virgin Media and O2.
Credit Suisse analysts said that BT “might now have to push harder on convergence” as until now the company has avoided diluting average revenue per user despite being the only fully operator offering a full array of broadband, mobile, TV and other services.
UBS said the creation of a stronger competitor “could be seen as negative” for BT but analysts at the Swiss bank said the pension deficit and infrastructure competition for Openreach were bigger issues.