Broker tips: BT, IG Group

Analysts at Berenberg downgraded UK telecoms giant BT to 'hold' on Tuesday as it questioned whether the group's normalised free cash flow would be enough for it to meet its strategic targets while maintaining its dividend payout.

Berenberg said BT's normalised free cash flow of almost £2.5bn was roughly £1bn higher than its dividend cost of £1.5bn.

However, the German bank noted that from this £1bn, BT has to support its pension deficit, buy spectrum, buy back employee share options to prevent dilution and fund restructuring.

"If new CEO Philip Jansen wants to increase investment to drive a return to growth, this would shrink the £1bn of headroom for such costs, putting the dividend under pressure," said Berenberg.

Carl Murdock-Smith and his team of analysts also highlighted concerns surrounding the group's rising debt.

Berenberg pointed out that net debt was principally increasing due to BT's pension deficit payments, spectrum, restructuring and one-off tax phasing but it noted that even once these mostly normalise by 2020/21, consensus estimates still had net debt rising.

IFRS 16 may also add £4bn-5bn to reported net debt as the firm's 2001 sale and leaseback of its exchanges moves on to its balance sheet, he added.

"Along with the pension deficit, this reminds us that BT's balance sheet is not as strong as it appears at first glance," said Berenberg.

RBC Capital Markets initiated coverage on UK-based trading outfit IG Group at 'outperform' on Tuesday despite noting that the firm's "robust growth trajectory" had been interrupted by the implementation of new EU regulatory measures.

While the Canadian investment bank thought most adverse regulatory scenarios were now "more than reflected in the share price", it did caution that regulatory changes in Australia did appear to be on the horizon.

RBC said IG, for whose shares it issued a 720p target price, was now well-positioned to weather the storm as the disorder and uncertainty surrounding the implementation of new UK/EU regulations had now begun to resolve.

"We would argue that the advantages afforded by IG Group’s leading competitive position within the CFD arena, as well as its ability to innovate and diversify (partially related to its ability to invest, and repurpose group resources), will become increasingly evident," said RBC's analysts.

However, RBC did note that it expects permanent client departures to continue, as well as lower levels of trading from other customers as the activity levels of the latter become more sensitive to market conditions.

The bank expects to see combined net profits from two of IG's new initiatives, the recently established regulated entity in the US which will focus on retail FX trading and its Spectrum offering in Continental Europe, an exchange-traded leveraged product which it expects to launch in May, to contribute roughly £9m per year in net profits by fiscal year 2022.

"Whilst IG’s previously robust growth trajectory has been interrupted by the implementation of EU regulatory measures. In our view, and based on our analysis, probable adverse regulatory scenarios are now more than reflected in the share price."