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Jefferies on BT plc | BUY: Pricing and Payments

by Anthony Weaver
Key Takeaway

We highlight two current discussion points. (1) BT has begun notifying Sport/TV subs of a price increase to take effect 28 Jul. This suggests some confidence in the consumer environment and the value that customers attach to the products. (2) The UK Govt’s Prompt Payment Code requires signatories to pay 95% of suppliers within 60 days. BT is not in compliance and sanctions exist. But we conclude that the FCF drag from becoming compliant should not be material.


Consumer confidence. BT has begun notifying BT Sport and TV customers of a price increase to take effect 28 July. This suggests some confidence in the consumer environment and the value that customers attach to the products. Customers are being notified directly. However, press reports assert that price increases range from £1/month on low-end plans to £4/month at the top-end. BT’s last-reported TV customer base was 1.7m as of Mar 2018 (trending stable) and we estimate the BT Sport base at ~4m. Assuming a high degree of overlap, we estimate that ~4.5m unique customers are in scope. Customers who re-contracted since 8 Mar (~5% of the base) avoid the price increase, but we understand that BT is not giving other customers the option to avoid it by re-contracting now. In practice, many Sport/TV customers are likely to haggle their way out of some (or all) of the price increase they face. If we prudently assume that just half the notified price rise sticks, and that the average increase is £2/month, net incremental revenue for BT’s Consumer division would be ~£50m pa. BT drew attention to Consumer headwinds at its 3Q18/19 results last Jan and post 4Q18/19 in May. We model Consumer revenue -0.4% y/y in FY19/20 (vs +3.0% y/y in FY18/19). In BT – Signalling Intent (20 May 2019), we estimated that Consumer faces £290-300m of revenue headwinds in FY19/20, mostly related to pricing (aligning tariffs of in- and out-of-contract customers, freezing price on the BT branded plans until Mar 2021). The price increase now being notified (which avoids the price freeze commitment that was linked only to ‘connectivity’ plans) is not anticipated in our forecasts. We are encouraged by BT’s evident confidence that this increase can be made to stick.

Prompt Payment Code. Set up by UK Govt in Apr 2017, the PPC encourages best practice in how companies pay their suppliers. Companies signing up to the PPC must pay 95% of suppliers within 60 days, unless there are exceptional circumstances. Signatories have a duty to report on their compliance every 6 months. Failure to comply can result in removal or suspension from the PPC. Vodafone was suspended on 28 Apr. We understand that removal from the PPC might result in companies becoming ineligible to tender for UK Govt contracts. BT is a signatory to the PPC and is not currently under sanction. However, BT’s latest PPC filing (dated 26 Apr) reveals that it was not in compliance with the 95%/60 day obligation in the 6 months to 31 Mar 2019. The filing (linked here: https://check-payment-practices.service.gov.uk/report/14799) discloses that BT paid 39% of suppliers after 61 days or more. To be in compliance with the PPC, BT would need to advance payments so that only 5% are made after >60 days. The issue for BT is how much of an increase in working capital will be needed to close the gap and how much time they have to do it. BT’s 2019 Annual Report states that £13.4bn was spent with suppliers in FY18/19. (The PPC makes no distinction between suppliers located in the UK or abroad.) If there were a need to advance payments equating to 34% of this spending, that would equate to £4.6bn pa, or ~£12.5m per day. Pulling forward by an average of 20 days, for example, to get inside the 60-day commitment would depress BT cash flows by £250m during the adjustment phase. Fortunately, however, we understand that BT’s PPC disclosures relate to the volume and not the value of their supplier list. We understand that BT has a fairly long tail of smaller suppliers and that >60 days settlements over-index into that segment. As a result, we understand that the working capital increase necessary to bring BT into compliance with its 95%/60-day PPC obligation is more in the range of low tens of £m.

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