BT Group plc’s (LON:BT.A) target price has been cut by Deutsche Bank, with the bank asserting competitive threats are not fully appreciated.
Deutsche Bank (DB) said the telecoms giant’s second quarter figures were “OK”, though key performance indicators were soft.
Of more concern is “BT’s relative tardiness to grasp the fibre nettle has left the co vulnerable to Catch-22-esque charges of being more focussed on shareholder returns than longer term investment,” DB said.
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An “escalating fibre land-grab” is going on, which may force BT to accelerate its own plans to lay new fibre-optic connections. Any acceleration would be costly and could put pressure on a juicy dividend that is already under pressure from the company’s well-publicised pension liabilities.
“Vodafone and Talk[Talk] aim to grow in fixed, Virgin Media (and others) in mobile and Ofcom is likely [to] further encourage infrastructure competition,” Deutsche said as it lopped 27p off its target price, which now stands at 238p.
“BT is working hard to mitigate but remains on the back foot and may stumble again,” the bank suggested.
BT may have to choose between maintaining market share and growing the divi
DB, a long-time bear on BT’s shares, said BT has a choice: it can roll-out the fibre network work quickly, the cost of which would mean the progressive dividend policy would either have to be funded from debt or abandoned; or it can rein in capital expenditure, and face the prospect of “meaningful wholesale/retail share erosion”.
“The ‘big in mobile and fixed’ investment rationale may work in the long run but has consequences for BT in the near-term as others converge in response to the EE deal and the regulator is encouraging alternative fibre build,” DB said.
The shares have lost a third of their value this year but the German bank sees little positive news potential.
A better outcome on pension top-up negotiations would help, as would being able to push through price rises.
Numis Securities draws comfort from Ofcom’s changed stance on ‘dark fibre’
Putting the case for the BT bulls was Numis Securities, which rates the shares as a ‘buy’ and has a 400p target price.
It has put out a note on BT in the wake of Ofcom’s updated regulations relating to the telecoms watchdog’s 2016 Business Connectivity Market Review.
The original set of regulatory measures was quashed by the Competition Appeal Tribunal earlier this year, so Ofcom has revisited the proposals and, among other things, has opted to allow BT’s Openreach broadband arm to restrict the use of ‘dark fibre’ – unused network infrastructure – for services of less than one gigabit per second (Gbps); previously, Numis noted, ‘dark fibre could have been used by rivals to undermine BT’s pricing for services offering speeds in excess of 1 Gbps.
“This is a clear incremental positive for BT,” Numis states.
“Crucially, Openreach was to price 'dark fibre' on a 'retail minus' basis off its 1Gbps Ethernet service, but its customers could use it to provide their own >1Gbps services; therefore, because of Ofcom's 'dark fibre' remedy, Openreach risked being unable to charge more for its own >1Gbps services,” Numis explained.
BT has a monopoly on broadband infrastructure in many parts of Britain, but is obliged to lease out its network to rival operators.
BT’s share price was down 1.5% at 245.35p in mid-morning trade.