BT bulls tip shares to rise 56%

Much has been written about BT since it warned last week that fraud at the Italian business would cost it over half-a-billion pounds. But, after crashing over 20%, shares in the once-mighty telecoms monopoly are one of the most heavily traded in London. Now, investors have two more opinions to consider before trading.

Barclays thought BT shares were worth 525p prior to the warning. However, even after the recent bloodbath, analyst Maurice Patrick still rates the shares 'overweight', and thinks the Italy issues and public sector slowdown are worth only a 10% downgrade to 475p, implying 56% potential upside from current levels.

He nips only a fraction off earnings per share (EPS) forecasts for 2016, still pencilling in a 1.6% increase to 31.8p. But estimates for 2017 drop by 8% to 28.9p, and by 11% for next year to a below-consensus 29p. Only in 2019 do profits increase significantly to 31.6p.

Downgrades are blamed on slowing revenues at the Global Services operations, which trims 2-3% off group sales, according to Barclays. Underlying pre-tax profit in 2018 is seen at £3.55 billion, down £433 million, or 11%, from previous estimates and little changed on 2017.

A commitment to dividend growth of "at least" 10% for the next two years is a confidence-builder. Implying a £1.8 billion cash outlay and factoring in £800 million of net pension costs, Barclays thinks it's affordable.

Estimated free cash flow of £3.4 billion in March 2019, suggests "£800 million of flex to offset potential further Enterprise weakness, higher content costs, adverse regulation or higher Fibre capex within a covered dividend".

BT shares also now trade on 11.4 times EPS estimates for 2018, a big discount to EU incumbent peers on 15 times. On an enterprise value/cash profit basis they're about equal at 6.1 times.

Over at Haitong Securities, analyst John Karidis has seen worse.

Yes, he admits BT's the warning was a "horrible shock", and he's cut forecasts to bring numbers in line with company guidance. But the fall has been dramatic and looks overdone.

"Prior to [the warning], we think the share price in part discounted Ofcom destroying significant value for BT," writes Karidis Monday. "At this level, we think the share price also expects BT not to recover any value in the areas that caused the group to profit warn.

"We believe BT's stock is very undervalued based on all our recent research on Ofcom, and on all BT said to explain the profit warning last week."

Haitong has also cut its perpetuity growth rate from 1% to 0% because BT's warning has damaged investors' confidence in the firm's ability to realise its good prospects.

This is why Haitong's fair value estimate drops from 560p to 445p, although it does reinstate its 'buy' rating given the recent slump.

"We think BT will claw back significant value in the areas that caused the profit warning," reckons Karidis. "First, BT is an accomplished cost cutter so we struggle to believe it will keep losing money in Italy after FY18." Demand in the US is also tipped to pick up, given Trump's pro-business approach.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.