BT Group PLC’s (LON:BT.A) plan to upgrade the UK’s broadband infrastructure is the biggest concern for analysts at Deutsche Bank.
The telecom giant’s network division, Openreach, is replacing the UK's ageing copper broadband lines with superfast fibre. It plans to connect three million homes and businesses to fibre broadband by the end of 2020 and has said it could expand "up to and beyond 10 million premises if the conditions are right".
READ: BT rivals TalkTalk and Vodafone threaten Openreach broadband dominance
Deutsche Bank said its main worry is how new chief executive Philip Jansen grasps the fibre to the premises (FTTP) programme, given the costs involved and the competition it faces from rivals doing the same thing such as Talktalk Telecom Group (LON:TALK) and Vodafone Group PLC (LON:VOD).
“On one hand dividends and pension constrain investment budgets, on the other, competitors are starting to receive funds for ambitious new builds and are mobilising to avail of duct and pole access regulation,” the German investment bank said.
“Openreach is also gearing up on FTTH (fibre to the home) but the land-grab will be fierce fought and with control of c.80% of UK broadband (wholesale plus retail), BT has more to lose than to gain.
“Whilst we are constructive on European telcos, not least as 'fibre becomes the new towers', BT's capital expenditure and convergence competition risks are higher than for other incumbent telcos.”
Deutsche Bank maintained a ‘hold’ rating and target price of 235p on the stock.
The bank also said an investigation by the UK’s Competition and Markets Authority into the so-called “loyalty penalty” – the amount a customer loses by being loyal to a firm – is another headwind facing BT.
BT strategy a 'silver lining from recent turmoil'
BT has taken steps to lower its high-cost base by closing its final salary pension scheme, cutting jobs and deciding to move out of its central London headquarters in St Paul’s.
Deutsche Bank thinks these actions present a “silver lining of sorts from recent turmoil”.
The telecoms firm will post its third quarter results on January 31 and Deutsche Bank expects to see evidence that the strategy laid out by former boss Gavin Patterson is starting to bear fruit.
Before stepping down late last year, Patterson unveiled his strategy, which included axing 13,000 jobs and launching new packages that combine broadband, mobile and pay-TV as a single service and bill.
He also merged BT’s business and public sector divisions with the wholesale and ventures arm to create BT Enterprise in a bid to streamline operations.
READ: BT's enterprise arm facing top-line pressures but cost cuts offer support, says Barclays
BT’s third-quarter results will, for the first time, include numbers from the newly formed enterprise division.
Deutsche Bank expects Q3 earnings and revenues to fall
Deutsche Bank expects the company to post a 6% year-on-year decline in earnings (EBITDA) to £1.8bn and a 1.7% decrease in revenue to £5.9bn, which is 0.6% above and 0.1% below company compiled consensus estimates, respectively.
“We feel that the UK market was broadly well-behaved in fiscal Q3, with none of the operators flagging a major change in the usual competitive cut and thrust however, Deutsche Bank estimates/consensus expect a deterioration in most business units post a H1 which benefitted from bonus accrual reversals and abnormal seasonality at Global Services, supplier rebates at EE and delays to wholesale volume deals at Openreach,” it said.
“We expect reiteration of FY19 guidance for EBITDA of between £7.3-7.4bn.”