BT Group plc (LON:BT.A) faces an increase in capital expenditure and the loss of wholesale customers, according to Citigroup.
Citigroup downgraded its rating on BT to ‘neutral’ from ‘buy’ and cut its target price to 310p from 360p.
READ: Morgan Stanley thinks “dividend sustainability appears the main risk” currently for BT Group
BT’s engineering arm, Openreach, last week outlined its offer to the government to improve broadband speeds across Britain, saying it will cost the company between £450mln and £500mln.
Openreach expects to recover the money through higher wholesale charges to rival broadband firms using its network.
In a note to investors today, Citigroup said: “Our estimate changes leave BT looking reasonably valued compared to peers, indeed somewhat expensive on FCF (free cash flow) yield. The main changes are the increase in capital expenditure and the loss of around 1.5m wholesale customers longer-term.”
Citigroup expects capital expenditure in fiscal years 2019 to 2020 to rise between 8-9%.
READ: BT Group remains undervalued, says an upbeat Numis
The bank noted that alternative local network operators have "bold plans for growth".
Citigroup also cut its rating on Talktalk Telecom Group PLC (LON:TALK) to ‘sell’ from ‘neutral but left its target price unchanged.
The broker said TalkTalk shares have rallied but the company faces risks in a transition to full fibre due to its relative lack of balance sheet flexibility.