Morningstar analysts are reducing their fair value estimate for FTSE 100 telecoms firm BT (BT.A) to 360p per share from 370p as the company reported weak fourth quarter results and lowered profits guidance for the financial year.
The firm's shares slid 7% to 220p on Thursday after it announced 13,000 job losses and said it would leave its central London HQ. Higher pension contributions, the cost of sports rights and a frozen dividend also affected sentiment towards the shares, but we believe that BT is still significantly undervalued and give it a four-star rating.
The company announced revenue and pre-tax profit in the next financial year due to a combination of adverse rulings from Ofcom that will reduce prices, greater competition, and intentionally leaving some low-margin business. To counter this, management announced a new round of restructuring, including laying off 13,000 employees and closing its headquarters near St. Paul’s Cathedral. It will also maintain its dividend for this fiscal year and next rather than increase it as in the past several years.
BT’s consumer revenue increased 3% as its broadband base increased 0.7% to 9.34 million and its consumer average revenue per user, or ARPU, grew 5% to GBP 41.70 per month. Importantly, it grew its fibre-based broadband subscribers 15.8% to 5.7 million. The firm’s wireless division EE also grew 4% as its subscriber base grew 4% to 17.6 million. The consumer and EE divisions will be merged this financial year, which should lead to launching a truly converged service, which is something we’ve been anticipating since the acquisition of EE and should lead to additional growth opportunities.
In the other divisions, revenue fell 12.7% in the global services division, 5.1% in the business division, 6.7% in the wholesale division and grew 2.8% in the Openreach division. However, providing some hope of improvemen,t the order intake in the global services and wholesale divisions jumped nicely in the fourth quarter
We believe the company will focus even more on reducing costs, particularly in the UK and in the global services division. Management announced a new restructuring program that will eliminate 13,000 jobs, though about half will be replaced by young engineers in the Openreach division that will enable faster deployment of a fibre network. While we expect some pressure on profit margins this financial year, we anticipate that BT's profit margins can improve thereafter, but even in 2023 it will still trail where it was in 2015.