BT Group PLC (LON:BT.A) and other European incumbent telecoms groups are in a better cash position than the market believes, suggests US bank JP Morgan.
And that might help explain the growing private equity interest in the sector.
Only this weekend, Dutch incumbent KPN rejected approaches from two private equity firms: EQT and KKR.
BT, meanwhile, has been buoyed by talk of a private equity firm taking a stake to help finance the upgrade of network arm Openreach.
JP Morgan notes that cash flow generated by the incumbents has fallen by 65% over the past decade and the outlook still remains uncertain with costs for the switch over to fibre from copper wire rising.
This spending is tipped to rise to €8.6bn in 2022 from €3.1bn in 2015, but that should be the peak says JPM and start to decline from 2024.
As this starts to occur, free cash flow generated by the telcos should slowly start to rise again suggests the broker, especially as fibre is likely to lead to lower maintenance costs as more of the network is converted.
JPM estimates fibre rollout by the incumbents will have risen to 61% on average by 2027 from 30% penetration in 2020.
BT, alongside Orange in France and KPN, should do well if this theme plays out suggests the broker, with Orange to be the first to test the idea from 2024 onwards.
But JPM admits that it needs more than a better medium-term cash flow profile to be bullish on the telcos currently and points to the growing private equity interest, infrastructure monetisation, and regulatory change as other catalysts.
Last month, JPM set a value of £22bn for Openreach and raised its share price target for BT to 230p from 170p.
Shares in BT rose 1% to 169.6p.