BT shares collapse amid Huawei woes

A post-election bounce proved short-lived, and shares are hurtling toward multi-year lows.

It was another head-in-hands session for BT Group (LSE:BT.A) investors today after below-forecast results extended the slide for shares to 20% since the end of a post-election “Boris Bounce”.

On top of disappointing third-quarter figures, BT revealed a potential £500 million hit over five years following a government cap on the use of kit from China's Huawei in 5G mobile and broadband networks.

Most of the old worries from 2019 also remain, chiefly around how much money that regulator Ofcom will allow BT to make from its multi-billion investment rolling out full-fibre broadband — with the inevitable consequences for cashflow targets and future dividend payments.

Source: TradingView Past performance is not a guide to future performance

CEO Philip Jansen admitted that the Q3 performance was slightly below expectations, but that BT remains on track to meet its guidance for the 2019/20 financial year, although free cash flow will now be in the lower half of the £1.9 billion to £2.1 billion range. His optimism longer term is underpinned by an ongoing drive to make BT “bolder, smarter and faster”.

The direction of travel for shares, however, remains the same as it has been since 2015 when BT was changing hands at almost 500p. The widely-held stock tumbled by as much as 8% today to 162p, which is close to the multi-year low seen in August.

The post-election bounce benefiting a range of UK-focused stocks had pushed BT above 200p, but the recovery only lasted a matter of days. As we reported in early December, this period of share price strength was viewed by Deutsche Bank as the ideal opportunity to sell ahead of BT's rising capital expenditure burden and as competition intensified.

Source: TradingView Past performance is not a guide to future performance

The bank reiterated this point yesterday when it cut its target price to 157p, and said the pressure was ratcheting up on BT to formally raise its full-fibre target and to cut wholesale rates.

To make matters worse, Comcast-owned Sky and Virgin Media are reportedly in talks about a joint venture to step up the pace of fibre broadband investment in competition to BT's Openreach division.

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BT said today its full-fibre build was now passing about 26,000 premises a week, taking the current total to 2.2 million. But with a target of four million full-fibre broadband premises by March 2021 and an expected country-wide roll-out by 2025, there will be no hiding place for BT investors from the balance sheet strain.

The City's estimate that this will mean higher incremental capex of £500 million a year has put analysts on standby for a sizeable dividend cut, although as we reported in October it would be “illogical” for BT to reveal its hand while still in negotiations with regulator Ofcom. 

Analysts at Jefferies have previously speculated that a 20% dividend cut might be the tactical concession that clinches a favourable regulatory outcome this year.

Aside from the recent renewal of the rights to screen Uefa Champions League football, Deutsche Bank said yesterday that there was “little else to get excited about” at BT. With a capex hike and dividend cut now seemingly discounted by the market, they noted that the next pension triennial valuation was fast approaching at the end of June.

Today's third quarter revenues of £5.78 billion were down 3.4% year-on-year and 1% short of consensus. Adjusted profits of £691 million were 6% below the market mid-range estimate, according to Deutsche Bank.