Berenberg hikes target price on BT

Berenberg noted that roughly two-thirds of BT's revenue was inflation-linked and said that when combined with ongoing cost transformation and the growing benefits of its investment in fibre, it believes this positions the firm to grow revenue, underlying earnings, adjusted earnings per share and normalised free cash flow in the 2022/23 trading year by 1%, 4%, 11%, and 23%, respectively.

"Of the consumer division's £10.0bn revenue, 80% is subscription-related; of this, 75% of customers are now on contracts with a CPI +3.9% annual price increase clause. Given CPI of 5.4%, the increase at the end of March will be 9.3%, providing a circa £550.0m revenue tailwind in 2022/23," said Berenberg.

"While some of this will be reinvested into retention discounts, the net result should still be strongly positive. Inflation-linked pricing is also applied to circa 80% of Openreach's £5.0bn revenue, which should provide a circa £200.0m revenue tailwind in 2022/23, albeit half of Openreach's revenue is internal."

The German bank, which reiterated its 'buy' rating on the stock, pointed out that the next two quarters, BT's fourth-quarter results in May and its Q1 numbers in July, should strengthen investor faith in the stock's investment case by demonstrating mid-single-digit EBITDA growth and showing that its top line had grown approximately 2% in the first quarter.

"BT trades on 19x EV/OpFCF and a 5% normalised EFCF yield for 2022/23E, versus telecoms incumbents on 16x and 7% respectively. However, as BT turns to growth on the back of its higher investment, we believe more attention will be given to metrics that smooth out investment, like P/E, on which BT trades at 10x (telecoms incumbents: 18x)," concluded the analysts.