Morgan Stanley braces investors for 'modest disappointment' ahead of BT's results

Morgan Stanley has highlighted a range of strategies BT’s newly installed chief executive could unveil next week, including spinning out Openreach, but has warned there is a real chance that there will be no significant changes to the strategy announced at the full-year results.

BT named Philip Jansen as chief executive in October, and the former Worldpay boss joined the blue chip in February. He will preside over his first official City presentation when BT posts full-year results on 9 May.

Morgan Stanley said there was 15% chance that Jansen could adopt a bullish stance at the results and announce a range of wide-reaching measures aimed at shaking up BT's long-term strategy. Possibilities include significantly reducing headcount, selling non-core, lower-margin assets, or separating out the fixed line network business Openreach.

“We think network separation would be most well received,” the analysts noted. “New opex targets and/or disposal of non-core assets could also be met favourably, albeit to a smaller degree.”

They argued BT's shares could improve by as much as 12% in this situation, noting: “BT's shares have been among the worst performers in telecoms, with the total return down 3% in the year-to-date and 39% in three years, suggesting that a different strategy from here could be preferable.”

Morgan Stanley said a more bullish approach could include announcing plans to cut the dividend or increase capex from £3.7bn currently to around £4.5bn, to funder higher fiber investments, which would weigh on the shares.

“We would expect to see selling pressure from dividend investors, but do not anticipate the shares to fall by as much as the near-term free cash flow downgrade,” the bank said. “Higher near-term capex could drive longer-term profitability and, ultimately, a more favourable relationship with the regulator Ofcom.”

However, Morgan Stanley said the most likely outcome was that there would be “no major deviations in strategy” at the results, which would be met with "modest disappointment". The focus instead would be on free cash flow and dividend; it is forecasting FCF for the 2020 of £2.1bn, down from £2.4bn in 2019, “reflecting headwinds in Consumer and Openreach”. It sees the dividend held flat year-on-year at 15.4p.

Morgan Stanley has an 'equal-weight' rating on BT and a price target of 250p.