BT charges to rivals rise after Ofcom ruling

Regulator Ofcom has lifted the wholesale prices BT can charge to other telecoms operators to cover the cost of inflation and rising costs.

Ofcom has raised the annual charge for an unbundled line from £81.69 to £86.40, and maintained this would allow BT's Openreach division to earn a fair return while encouraging consumers to continue taking up broadband at competitive prices. BT's shares have added 2.1p to 88.4p on the news, but analysts are divided on the impact. FinnCap was positive saying:

"Specific measures put in place to encourage competition in the UK telecoms market, the most competitive in Europe, have succeeded such that more of that regulation can now ease. With the increase in take up of competitors' unbundling of the local loop (allowing competitors to take control of the 'last mile' of copper from the exchange to the customer's house) Ofcom has allowed BT to raise [the] price from £81.69 to £86.40.

"This will only add £25m-£30m to BT's annual turnover, but is important in emphasising the difference between BT and Vodafone in regulatory perception. Vodafone remains in an environment where on a UK and European basis the regulator is enforcing price reductions. BT is now benefiting from an easing of regulation. Again, we see this as good reason to switch out of Vodafone into BT."

But in a sell note Investec said the new pricing framework for Openreach was not as positive for BT as it had expected. Analyst Jonathan Groocock said:

"Full local loop unbundling (LLU) price increases are at the lower end of the range, with partial LLU prices remaining flat. Full LLU prices are increased to £7.20 per month (+5.8%), with RPI +5.5% inflation in 2011. The proposed range was £7.08-£7.58 per month, which means the rise is in the lower quartile of expectations. That said the indexation for 2011 is above the top end of the range.

"Shared LLU prices stay flat at £1.30 per month, with RPI +1% inflation in 2011. The proposed range was £1.30 to £1.35, so the lack of price increase here is not a great surprise, but nonetheless this is not as positive for BT as it could have been.

"We had hoped that BT would be granted price increases for both full and partial LLU, this is not the case. At the same time, hopes remain that Openreach employees' portion of the pension deficit will be factored into costs – this discussion is likely to be deferred until 2012. With a lack of significant income from dividends for BT shareholders, we see little reason to hold the shares.

"These price rises are negative for full LLU operators such as Carphone Warehouse . [They] could impact costs by £5m-10m per annum, impacting 2010 estimated earnings by up to 4%. We reiterate sell on both BT and Carphone Warehouse."

At the moment Vodafone is up 2.65p at 116.45p while Carphone has edged up 1p to 164.5p.

Still with telecoms, Cable & Wireless is down another 3.5p to 138.4p following yesterday's disappointing full year results and news that director Tony Rice had cashed in around £5.5m worth of shares. Today JP Morgan downgraded its recommendation from overweight to neutral and cut its price target from 180p to 160p. It said:

"Weak results followed [a] controversial LTIP [long term incentive plan] announcement on Tuesday. Revenue growth slumped in the second half, a trend not hinted at in the 10 February third quarter interim management statement, nor subsequently. C&W revealed another raft of new restructuring charges, the 'exceptionality' of which is open to debate in our view. The first LTIP pay-out was based on the average share price in March. The LTIP extension could generously reward management if the wider market rebounds, even if C&W does not outperform.

"We believe that management credibility has been seriously undermined by this week's events. Confidence in management execution has been a fundamental reason to invest in what was otherwise a highly operationally geared story where visibility on critical success factors has been lower than for the average telecoms company.

"C&W remains a geared play on eventual macro recovery, in our view. [However] there are plenty of cheaper telcos that we believe offer better visibility."

Morgan Stanley analysts also said they saw limited appetite for the shares in the near term.

Lower down the market a couple of fundraisings hit the shares of the companies involved. David Montgomery's publishing group Mecom lost 1.4p to 3.6p as it unveiled a six for one rights issue at a deeply discounted 1.5p a share to raise £141.5m. It has also agreed to amend its bank facilities.

Home shopping and education supplies business Findel fell 42.25p to 108p after it said it was considering an equity issue. Singer Capital Markets said:

"No final decision has been on [a fundraising] but Schroders and the chairman (in aggregate around 40% of the register), have indicated initial support for a rights issue.

"Management has also indicated that pretax profit for the year will be at the lower end of the range of expectations, and therefore in the order of £38m-40m [compared to Singer's estimate of £42m], driven mainly by weak sales in Home Shopping (lower recruitment and weak backdrop) and weak sales in Education (a recent trend as public sector funding concerns have increased).

"Given the revelations about a possible rights issue, coupled with a slight miss on the forecasts, we expect the shares to come under pressure today."

Source: The Guardian, 22nd May 2009

 

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