After attending an “upbeat” briefing on the telecoms group’s Openreach infrastructure arm, which it says is building out its fibre-to-the-home (FTTH) network at three times the rate of its nearest competitors at the current 1.3mln premises, with the build rate also seen rising to 3mln per annum.
“Openreach believes consumers are willing to pay a modest premium for improved quality (better speeds/reliability) and that pricing can improve over time as Ofcom incentivises investment,” UBS analysts said in a note to clients.
BT does not expect any cuts to regulated wholesale pricing, though it is still “seeking clarity” on pricing, returns and copper switch-off timing but is optimistic on this month's review from regulator Ofcom.
UBS's analysts, who reiterated a ‘neutral’ rating on BT shares with a 165p price target, noted that Openreach is aiming for a 15% pre-tax return on FTTH.
But with the high level of investment and the dual costs of running a fibre and copper network, plus with costs stepping up in the near-term because of rising business rates and the expansion of the workforce, there is considerable short- and medium-term pressure on cash.
The analysts said they see a risk of only “modest” premium pricing for fibre, though Openreach sees sustained revenue growth going forward, based on a strong uptake and inflationary pricing, with cost benefits in the future from the copper switch-off.
“While we see a path to growth, we also note reports that Sky and TalkTalk are looking to wholesale from Virgin Media and Cityfibre respectively and this could lead to a step down in revenues,” the analysts added, with TalkTalk having recently enjoyed record fibre sales.
The UBS analysts forecast BT's dividend remaining at 15.4p per share this year but that it will be sliced down to 10p for the years after, bringing the dividend yield down from current 8.3% to around 5.4%.