Numis said it remains “very bullish” on BT following an investor meeting with the telecom giant’s investor relations team. The broker has left its rating on the stock at ‘buy’ with a target price of 400p.
Alternative network providers (altnets) are unlikely to steal a march on BT’s Openreach subsidiary, Numis added.
READ: BT Group has failed to grasp the fibre nettle, says Deutsche Bank
“First, Openreach builds FTTP (fibre to the premises) every year, so the only question is whether it should build faster,” Numis said.
“Second, Openreach is the incumbent with a workforce of 30.4k people so, most likely, no one can deploy FTTP faster.
“Third, independent Openreach must be economically rational and act to benefit its 500+ communication provider clients, so we think it will overbuild altnets and Virgin Media.”
Lastly, Numis said aspiring wholesaler CityFibre must build FTTP but also an expensive IT system if it wants to serve multiple communication providers.
BT getting a handle on pension deficit
BT is also trying to cut its pension deficit with a number of measures including a proposal to close the defined benefit scheme to new accruals and switching the rate used to calculate its pension increases from the retail price index to the lower consumer price index.
The changes to its pension scheme come ahead of a triennial review of its assets and liabilities, which will be completed next year.
Numis noted that it plans to materially outperform consensus forecasts of a £11.5bn pension deficit and three-year top-ups totalling £3bn.
Loss of public sector contracts may cease to be a problem
Meanwhile, its prospects for underlying earnings in the business and public sector are much better than bears expect, Numis said.
BT warned in its full year results at the start of the year, that spending constraints by Prime Minister Theresa May’s government squeezed some existing contracts to make them less valuable than forecast, and new contracts had failed to materialise.
But Numis said the loss of public sector contracts will cease to be a problem by the end of fiscal year 2018.
READ: BT Group to invest in ‘ultrafast’ broadband in Northern Ireland
It highlighted that in 2017, the company won more mobile market share and expects this to continue for the next three to five years.
“In addition, fixed/ mobile convergence will likely grow the enterprise mobile market: in the UK, c.30% of employees have business mobiles, vs 50%+ in more advanced markets (e.g. Sweden),” it said.
BT can handle higher costs for Premier League TV rights
For the first quarter of 2018 auction of exclusive TV rights to Premier League (PL), Numis believes risks are well under control.
“BT's aim remains to be no more than a good No. 2 player. In 2012, the rise in BT's cost for PL TV rights (from zero to £246mln) was 11% of yearly FCF after pension top-ups and exceptionals.
“For Sky, this rise (from £541m to £750m) was 22%. In 2015, the equivalent numbers were 4% for BT and 77% for Sky.”
BT will be able to claw back the costs for PL rights through its 17.3m mobile contract customers, Numis said.