Broker snap: BT's fundamentals sound, valuation attractive

10th May 2012 09:33

Nomura has maintained its buy recommendation and 295p target price for telecoms titan BT, saying that while fourth-quarter revenues were soft, earnings, free cash flow and guidance were strong.Fourth-quarter adjusted revenues fell 4%, 0.9% below Nomura's forecast owing to weaker revenues in Openreach and Global Services. However, earnings before interest, tax, depreciation and amortisation (EBITDA) were 2.7% better than expected and the margin came in at 9.3% (Nomura was expecting 8.4%). Meanwhile, free cash flow was £2.52bn, 3% ahead of estimates owing to better profitability and lower-than-expected capital expenditure.The firm also said that underlying revenue and EBITDA would improve in 2013 and 2014, while the broker was expecting little change: "Amid a difficult economic environment, we expect investors will find this guidance reassuring for BT's fundamental growth prospects, which underpins our buy rating."The broker did note BT's decision not to rebase its dividend after announcing an 8.3p-a-share payout, up 12% on last year but below the high-end forecast of 11p. BT said dividends should grow by 10-15% a year for the next three years and there will be a share buy-back programme of £300m in 2013."There is a risk that investors feel short-changed from a low pay-out post the pension settlement and also that this undermines confidence in the pension settlement itself, but BT has polled key investors from whom the key demand has been affordability and growth - which should at least mark BT apart from other telecom peers," Nomura said.As for the valuation, the broker highlights that the stock is 9% off its recent highs and trades at a slight discount to the sector. BC