Shares in the former UK telecoms monopoly rebounded more than 40% from lows in October and November.
“The shares are seemingly benefiting from a rotation into value and a resolution on Brexit,” said UBS analyst Polo Tang in a note to clients on Friday.
“In our view, while the company is pursuing the right strategy, the re-rating for the stock has gone too far too soon; and we think catalysts over the next six months could present a source of downside risk for BT.”
The analyst said BT’s Openreach arm and the group’s pension deficit are the “two biggest drivers” for the shares, in the UBS team’s view.
Openreach is being valued by the market at around £14-20bn with the delta representing around 60p/share, Tang said.
With the current “lack of clarity” on allowable returns beyond 2031 from Openreach and the 2021-2026 ‘Wholesale Fixed Telecoms Market Review’ (WFTMR) regulatory framework still to be finalised – and expected in March, the analysts said they “think it is difficult to value Openreach significantly above its [regulated asset base] of £14.1bn”.
Separately, with Virgin Media looking to expanding its footprint by 7-10m homes, with the prospect of closer co-operation between Sky and Virgin Media, BT and Openreach face “a source of notable downside risk”.
On top of that, the actuarial pension deficit is estimated at £10.9bn gross by UBS, above the consensus forecast of £9.0bn and the triennial review is due by June 2021.
The analysts said they think the pension deficit is likely to cap the dividend at 4p per share, versus the consensus estimate of 7.1p, and may also limit the likelihood of M&A for the group as well as its ability to sell a stake in Openreach.
Risk doesn’t end there, either, with the structure of the 5G spectrum auction at the end of January, potentially resulting in higher than expected bidding tension and be an overhang on BT.
The 5G spectrum costs are forecast at £1.02bn by Tang, versus the current consensus of £740mlm.
All in all, this led to UBS’s rating being cut to ‘sell’ from ‘neutral’ and the share price target being trimmed to 111p from 116p.