BT Group (LON:BT.A) should be able to create value and sustain, or even grow, its dividend as it separates its network unit Openreach from the rest of the company, according to Barclays Capital analysts.
The telecoms giant in March reached an agreement with UK watchdog Ofcom to make Openreach assume greater independence under its own board of directors. The move followed complaints about competition from BT’s broadband rivals who must use Openreach networks to reach customers.
“So far much of the discussion on Openreach and Fibre has been whether the regulatory climate is supportive for investment in full fibre (this remains a live issue), and if the business case can create value,” Barclays said.
“Our detailed work shows BT should be able to create value in most scenarios, and in all cases sustain (and even grow) the group free cash flow/dividend.”
Barclays reiterated an ‘overweight’ rating and a target price of 450p.
Co-investment creates risk, says Barclays
The medium-term risk for BT is that Openreach will pursue co-investment opportunities with third parties to support its plans to upgrade the existing copper network to full fibre, the bank added.
BT could deliver full fibre to about 10 million homes by 2025 with £3.4bn capital expenditure based on an estimated cost of £500 per home, Barcalys said, adding that this could boost growth and dividends.
The challenge for BT, however, will be finding an acceptable solution for Openreach’s service providers while preserving current market value of retail average revenue per user.
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BT continues to be the only operator with both fixed and mobile networks. Its competitors typically have access to one of the two, and have cost bases exposed to increasing data consumption on fixed lines and mobile.
BT to lead rising uptake in convergent pricing offers
Barclays said BT is likely to lead an increase in the uptake of convergent pricing offers.
“After a period of increasing regulatory pressure on BT, Openreach is now trying to establish a viable model to build fibre to the home, consulting its key stakeholders (and BT competitors),” Barclays aid.
“The timing is of particular interest as we are starting to see greater focus on convergence, and most of BT’s competitors lack a route to having both fixed and mobile network economics, which limits their strategic flexibility.”
Shares in BT climbed 0.34% to 314.45p in morning trading.