BT Shares Drop 20%, Analysts Downgrade Firm

BT has today announced its investigation into its Italian operations had been more serious than previously reported, but analysts consider the market to have overreacted

Allan C. Nichols, CFA 24 January, 2017 | 1:54PM
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BT’s (BT.A) shares have dropped 20%, wiping almost £7 billion off the telecoms firm’s value following today’s announcement that its investigation into its Italian operations had been more serious than previously reported, with sales overstated and costs understated over several years.

The adjustments identified now total £530 million, versus its previous estimate of £145 million. In addition, management announced that the U.K. public sector and international corporate markets have deteriorated. In total, it now expects sales excluding the acquisition of EE to be roughly flat this year and next year, and EBITDA to be lower. We expect to reduce our fair value estimate for the shares to £3.70 from £4. There is no change to our narrow moat rating.

However, we think the market has overreacted and the shares are now undervalued. We believe the market is projecting that similar accounting shenanigans have occurred in other countries. While we acknowledge that this is a risk, we don't believe it is likely. We also believe what happened in Italy is different from what happened in the global services division in 2009, when BT booked revenue and costs based on several very large partially completed projects that turned out to have much higher costs than originally estimated.

We think the Italian issues were smaller, but over a longer time period. We believe management knew it was being aggressive, but expected the economy would bail it out, which it hasn't. The Italian management team has been replaced.

Elsewhere, the firm continues to expand its fibre broadband subscriber base and the retail division is growing nicely. We are also pleased to see the firm begin to charge its broadband customers who are on low-end packages for access to its sports channels. This is something we believe is necessary for the firm to have any chance of generating a decent return on its sports programming investment.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BT Group PLC185.00 GBX3.01Rating

About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.