BT Group plc (LON:BT.A) has a strong position in the UK telecoms market but is facing regulatory hurdles and uncertainty over capital expenditure, according to Berenberg.
In a note on the telecoms sector, Berenberg reiterated a ‘hold’ rating on BT but cut its target price to 320p from 325p.
Ofcom is clamping down on BT’s Openreach network subsidiary over the prices it charges other telecoms providers. Openreach is planning an overhaul of the UK’s broadband infrastructure to improve internet speeds and had hoped to claw back some of the costs through its customers.
End of an era?
But Berenberg thinks the era of unconstrained price rises seems to be ending given the tightening of regulation and this poses a risk to consumer revenues.
On the roll-out of ultrafast fibre-optic broadband, Berenberg acknowledged that BT is in a situation where it has to tolerate a return on investment that is less attractive than it would like.
It also recognised that BT’s triennial pension review to plug its deficit is ongoing.
However, risks related to the fibre to the premises (FTTP) upgrade and the pension review are already priced into the shares, Berenberg said.
Berenberg is also “less worried” about the threat to losing its Premier League broadcasting rights in the next bidding round in February.
BT's third quarter results
Ahead of BT’s third quarter results on Friday, Berenberg said its revenue and underlying earnings (EBITDA) estimates are broadly unchanged.
“However, we do revise our estimates to factor in lower capex in the Global Services division and universal service obligation (USO), which is now estimated at £600m (previously at £1.6bn),” it said.
“It should also be noted that we do not explicitly factor capex FTTP given lack of visibility.”
Berenberg said its EBITDA forecasts for fiscal years 2018 to 2020 are largely in line with consensus estimates.
READ: BT to report drop in third quarter earnings as Premier League rights auction looms
BT has been regaining broadband share thanks to its strategy to bundle premium sports content with broadband and voice. However, momentum in its broadband key performance indicators has started to slow, Berenberg noted.
Berenberg said the acquisition of UK mobile operator EE has furthered strengthened BT’s proposition in the consumer market and provides potential revenue upside in the B2B mobile market, where the company had previously been almost absent.
BT’s valuation is broadly in line with its peers but Berenberg said its price target, though revised lower, still suggests upside for the shares.
“However, we struggle to see sufficient positive catalysts for the shares to recover lost ground in the near term,” the broker added.
Berenberg leaves Vodafone at 'buy', hikes target price
On rival telecoms provider Vodafone Group PLC (LON:VOD), Berenberg said it said the company will benefit from plans for a joint investment with BT in ultrafast broadband.
The broker thinks this, combined with growth in the Africa, Middle East and Asia Pacific region, can sustain top-line growth of 2%, even with headwinds from the launch of competitor Iliad in Italy.
Berenberg repeated a ‘buy’ rating and raised its target price to 253p from 240p.
“Meanwhile, operating costs in absolute terms are trending down and this can continue for several more years yet given that digital transformation still presents an opportunity to make c25% of the cost base more efficient,” Berenberg said.
“All in all, delivering EBITDA growth above consensus looks an increasingly credible prospect…”
READ: BT considers appeal on court ruling against plan to change index for pension rises
Vodafone reports its third quarter trading update on Thursday.
Berenberg has forecast service revenue will be boosted by above-consensus growth in AMAP. It believes top-line trends in the carrier business should be ignored given it being affected by the implementation of a new routing system that is leading to higher EBITDA.
“This should feed into 9% year-on-year growth in second half EBITDA, 2% above consensus.
“By FY 2019/20 we are 3% above consensus estimates despite looking for a bigger headwind than consensus from Iliad’s launch in Italy.”