BT Group plc’s (LON:BT.A) valuation is sufficiently attractive to turn positive on the stock, Berenberg said as it upgraded the stock.
Berenberg raised its rating to ‘buy’ from ‘hold’, saying it expects visibility on its investment case to improve in coming months.
"Investors are currently focused on BT’s triennial pension review, the outcome of Ofcom’s wholesale local access (WLA) review, and the risk of materially higher capital expenditure due to increased fibre-to-the-premise (FTTP) rollout putting the dividend at risk," the broker said, cutting its target price to 310p from 320p.
"We will know a lot more in the next six months on these topics, improving the clarity of the BT investment case, while we believe that the current share price reflects fairly negative outcomes on all fronts."
Shares rose 4.2% to 242p in late morning trade.
Ofcom on Friday delivered a better-than-expected outcome following its review into price controls for BT’s Openreach network.
READ: BT shares jump as Ofcom eases price controls on Openreach
Berenberg, which published its note on BT before Ofcom’s announcement, said the company is set to come in at the bottom of its annual guidance range for underlying earnings (EBITDA) and faces another challenging year ahead.
Return to growth expected in 2019
But by fiscal year 2019/2020, Berenberg expects a return to growth in EBITDA, revenue and normalised free cash flow on the back of its broadband infrastructure investment, the end of public sector headwinds, remedial action to fix the accounting scandal in its Italian business and scope for outperformance in cost synergies from its acquisition of mobile phone operator EE.
“Even though we are slightly below 2018/19 consensus, we believe the valuation is sufficiently attractive to turn positive now,” it said.
“We believe that improving clarity on key strategic issues and increasing market confidence that financial trends will return to growth should stimulate a re-rating. As such, we upgrade to Buy.”
On BT’s pension scheme, Berenberg believes the deficit was £10bn-£12bn in June 2017. It expects deficit recovery payments of £2.6bn over the next three years with scope for a lower number if pension trustees agree to asset-backed contributions.
“Longer-term, BT is unlike most telecoms companies as it would actually be a beneficiary if real interest rates increase, as the pension deficit would shrink,” Berenberg said.