What does a £500m Huawei bill mean for BT’s share price?

BT’s share price has rung up a substantial decline since April. Costs and inflation have weighed on sentiment, while BT recently announced that it has had to stump up £500m to strip out Huawei technology from its network. However, last week BT shares were on the up following some much-needed optimism around the UK economy.

• BT stumps up £500m to strip out Huawei technology from its network.
• BT’s share price gained last week as some optimism returned to the UK economy, but has slumped since the spring.
• First quarter results show revenue and earnings growth.

Since the spring, BT [BT-A.L] shares have been getting a poor reception from investors. On 19 April the stock edged just north of 161p. From then on, the BT share price rang up a 25% decline, with the stock closing Friday at 119.4p.

Causing investors to hang up on BT shares have been both inflation and the rising costs of rolling out its fibre network. In July, outgoing BT boss Philip Jansen went as far as blaming the share price slump on “short term” investors who find it hard to take a longer-term view of the business. This is a challenge for BT, which is investing heavily in rolling out high-speed fibre broadband to 25 million homes by 2026.

BT looking at a £500m bill to replace Huawei technology

A reminder of the scale of costs associated with the telecoms sector came on Wednesday, when BT’s chief security and networks officer Howard Watson said the ban on using Huawei equipment to build out the UK’s 5G network has cost BT a whopping £500m.

The ban was put in place in 2020 after Shenzhen-based Huawei was designated a high-risk vendor. BT has until 2027 to strip out existing Huawei technology from the network.

“We don’t get any additional money when these things happen,” Watson said. “The net effect of the Huawei high-risk vendor swap legislation means we’ve had to scale back 5G.”

Having to shell out half a billion pounds replacing 5G technology is no joke, although BT said that it was on target to strip out Huawei by the end of the year.

News of the additional spend didn’t dampen BT’s share price performance, which rose over 2% last week. Investors may have already factored in the costs of updating the network following the ban.

Is now a buying opportunity for BT shares?

BT shares have joined a club of UK stocks that have underperformed the FTSE benchmark over the past 12 months. Other members include house builder Persimmons [PSN.L] and banks like Lloyds [LLOY.L]. The main drag on these UK stocks has been rising inflation, continued interest rate hikes and the overall gloom surrounding the economy.

Yet all three stocks bounced last week after the Monetary Policy Committee decided to hold the bank’s rate at 5.25%, after UK inflation unexpectedly fell in August. Should optimism return to the UK market then there could be some upside in these stocks.

Deutsche Bank also reaffirmed its ‘neutral’ rating on BT this month, saying the stock was trading at “not unattractive” levels. The bank has a 145p price target on the stock, suggesting a 22% upside on Friday’s close.

For income seekers, BT rewarded shareholders with a 5.39p dividend following full-year results, having paid out a 2.31p interim dividend. BT had cut payouts during the pandemic.

In terms of the financials, BT has seen both sales and earnings rise in its financial first quarter.

Pro forma adjusted revenue rose 4% year-on-year to £5.2bn, thanks to increased fibre sales, price increases in Openreach and more service revenue. Pro forma adjusted EBITDA was up 5% to £2bn. Pre-tax profits rose 11% to £536m. BT confirmed its 2024 guidance.

Where next for BT shares?

Building out a 5G network is never cheap, and costs have become an increasing focus for BT. Full-year results for the 12 months ending 31 March show capital expenditure excluding spectrum rose 5% to £5bn, due to higher fixed network investment primarily in Openreach, connecting more customers to its fibre network.

To address this BT has announced that it had made £2.1bn in cost savings since 2020, against a £3bn target. The group is also shedding 42% of its workforce by 2030. Once the fibre-optic rollout is complete a leaner operation could ring up more profits.

Next year there will be new leadership at the top of BT, when board member Allison Kirkby takes over from Philip Jansen. Kirkby is currently head of Sweden’s Telia. The fact that Kirkby is a current BT board member, and signed off on Jansen’s cost-cutting strategy, could provide some stability for the group.

Among the analysts tracking the stock, BT has a 190p 12-month median price target. Hitting this would mean a 59% upside on Friday’s close. However, it’s worth remembering that BT’s share price has halved since 2019.