BT: analysts see positives and negatives as Patterson gets push
UBS is positive on BT Group as the telecoms group puts the phone down on boss Gavin Patterson, thinking the news "could be positive for investor sentiment" but doubting whether the board can, as they suggest, make no change to strategy.
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Jefferies analysts said it seemed "highly unlikely" this signals near-term risk to forecasts, especially as BT has not updated on the outlook in this morning's statement.
"Instead, we believe the decision reflects adverse shareholder reaction to BT's results last month and Patterson's leadership. The potential positive now, in our view, is that his departure may ease bottlenecks in discussions with Ofcom as BT seeks a fair bet regulatory settlement on fibre."
After the BT board expressed in the Friday statement that it remains supportive of the recently outlined strategy, suggesting no significant strategic changes, several analysts were perturbed.
"However," UBS wrote, "we think issues that an incoming CEO will have to address are: the pace of FTTH rollout at Openreach; the strategy around BT Sport; the future of Global Services; execution of the Transformation programme and how much of the £1.5bn pa of cost savings should be re-invested back into the business."
With BT having pulled down expectations post weak fourth quarter results and unveiling a new staff and office restructuring, UBS thinks the guidance is "conservative" and "leaves some headroom for Openreach to accelerate its fibre (FTTH) rollout".
On a sum-of-the-parts and discounted cashflow valuation the shares look "relatively cheap", offering a 9.0% calendarised equity free cash-flow yield and 7.6% dividend yield. UBS kept its 'neutral' rating and 210p price target for now, also reiterating the view that the pension deficit at BT will narrow over time and that there should be growing visibility over economics for fibre capex. "That said, it will likely take several quarters to restore investor confidence after the recent reset to estimates."
Macquarie felt Patterson paid the price for his "losing battle with Ofcom over Openreach and failure to recognise the investment tide was moving against BT’s previous cash flow targets".
The Aussie bank said BT was "over-earning" in 2014 and 2015 and the Openreach and Ofcom battle was one that BT could not win.
Macquarie said its "greatest fear for the UK market is should Amazon resell FTTp connectivity with its Prime TV offer. This would upset the current market structure more substantially."