BT Group PLC (LSE:BT.A) has been slapped with a conviction sell rating by UBS, which believes the increasing impact of competition on its Openreach arm is being underestimated and masked by recent price rises.
In particular, there is material exposure to two large clients – Sky/TalkTalk – both of which are shifting business away from BT/Openreach over to altnets, which are 20-40% cheaper.
"Sky spends over £1.1bn a year on broadband wholesale costs exclusively with Openreach and recently announced a deal with CityFibre that we estimate will see £150-300m of business annually transfer".
As BT is paying no UK taxes, the impact is minus 10-20% on group cash flow.
TalkTalk also spends more than £1bn as year with Openreach but its subscriber numbers are dropping.
Broadband line losses are also accelerating and if line losses do not improve, Openreach revenues look set to turn negative.
Adjusting for underlying costs, BT is trading on a yield broadly similar to bonds with a dividend uncovered by cashflow and pensions payments rising.
In short, UBS sees the shares pricing in continued growth in Openreach, an improvement in line losses, ongoing cost saves at BT and growing free cash flow, which it sees as unlikely.
Shares rose 0.4% to 142p.