BT's pension deficit swells to £14.2bn, UBS says

Warning that BT Group's pension deficit has probably widened significantly, UBS cut its price target on the telecoms group and held its 'neutral' rating.

UBS estimated the BT pension deficit now stands at £14.2bn on an actuarial basis, versus the £10.0bn disclosed by the trustees from June last year.

"While a widening of the deficit may seem counterintuitive given the recent rise in gilt yields, yields are still notably lower than June 2015 and inflation assumptions have moved higher recently too," the Swiss bank added.

At current levels, every 10 basis point increase on gilt yields is a £800-900m reduction on the liability and every 10bp increase in the inflation assumption is a circa £700m increase in the liability.

The net deficit value in UBS's sum-of-the-parts valuation for BT rises to £11.4bn compared to the £8.0bn before and leads to a 34p reduction in the SOTP, though the target price was only cut to 400p from 425p before due to marginal upgrades made elsewhere.

Risks are seen from the Project Lightning rollout by Virgin Media as well as the potential broader partnership between Virgin's owner Liberty Global and Vodafone.

Analysts said the stock does not look expensive on an 8% equity free cash flow yield on 2017 forecasts on a calendarised basis post pension payments and a circa 4.5% dividend yield.

"We see BT as a well-positioned converged operator, but are wary of increasing competition leading to downside risk to estimates."