The US broker said the removal of the pension uncertainty adds 10p to its price target, which is now 280p, but it is Infinity, the company’s high-speed fibre broadband service, that is driving BT’s cash flow.
Every one million new Infinity subscribers generates around £70 million of incremental cash flow for BT, which could rise to £100 million if the group increaes market share as well, said Morgan Stanley.
The turnaround at the Global Services business is also being underrated says Morgan, which believes this division is a source of hidden value for the company.
Global Services is still not generating cash and will lose money this year, but cost-cutting by BT could turn this around markedly by 2015.
The broker also expects a steady rise in dividend payments over the next few years.
It expects the company will lift the dividend progressively to 12 pence by the year end 2014 from 7.4 pence last year.