BT Group PLC (LSE:BT.A) second-quarter results this Thursday may reveal more broadband customers switching away from its Openreach arm than investors expect, reckons UBS.
Analyst Polo Tang, who has a 'sell' rating and 135p price target on the shares compared to the last close price of 183p, with BT’s network infrastructure arm ongoing line losses also signalling mounting competitive pressure and revenue risk that recent broadband price cuts and cost savings may not be enough to offset.
Openreach has been losing lines at a faster pace than previous guidance indicated, Tang said, due to increased churn to alternative fibre providers (AKA altnets) such as CityFibre and Community Fibre, following new wholesale agreements with major players like Sky and Vodafone.
Line losses in the June quarter totalled 169,000, following 208,000 and 243,000 in the two preceding quarters, compared with BT’s full-year guidance of 900,000 line losses.
The analyst thinks losses in the upcoming quarter could exceed the -221,000 consensus estimate, citing stronger net adds at competitors and limited mitigating effects from Openreach’s temporary pricing offer.
To stem the outflow, Openreach has temporarily reduced wholesale FTTP pricing to £16.50 per month, aligning it with slower legacy copper-wire VDSL products to encourage upgrades.
While this may help reduce churn, Tang warns it will come at the expense of both Openreach and BT Consumer revenues, and may not be enough to reverse broader pressure on broadband market share.
He also notes that Openreach’s move to cut prices for 1.2Gbit/s and 1.8Gbit/s services by up to 24% – pending Ofcom approval – is unlikely to materially improve competitiveness, given that most users remain on sub-80Mbit/s packages and altnets already offer wholesale pricing at £13–£16 per month.
Tang envisions further downside risk to BT’s medium-term earnings profile forecasts.
This is due to a longer-term decline in Openreach revenues to £5 billion per year from £6 billion currently, assuming Openreach’s broadband infrastructure market share eventually declines to around 45%, from over 60% today.
While BT has historically benefitted from its cost-saving plans, the analyst doubts this will fully counterbalance the dual pressure of subscriber losses and declining average revenue per user (ARPU), especially if pricing remains subdued.