BT Group PLC (LSE:BT.A) is still a 'buy' for analysts at Jefferies who think that this morning's headline in the Financial Times (FT) that Openreach cutbacks are hitting the company's FTTP (Fibre To The Premises) expansion "is misleading".
The Jefferies' analysts noted that the FT suggests that Openreach is seeking to limit its investment in the FTTP roll-out. Specifically, it said Openreach has informed contractors that it will focus investment on completing roll-outs at partially-covered locations and will postpone roll-outs in new locations. Current FTTP coverage is 9mln premises and there is an additional 6mln backlog that is partially completed.
They said Openreach CEO Clive Selley is quoted as saying that what will be suspended is work on surveys and estimates for future work beyond this 15mln footprint, but he asserts that Openreach remains committed to the target of covering 25mln premises by December 2026.
At the half-year, BT guided that FTTP capex will be focused on provisioning customers onto the network. The company's management indicated that the FTTP footprint should increase by around 3.2mln premises in full-year 2023 (FY23) against a prior target of around 3.5mln, which would allow more resources to be directed at provisioning.
The analysts noted that BT disclosed that new FTTP orders came in at the rate of 44,000 per week during 2Q FY23, but that Openreach was only able to connect 25,000 per week. BT also asserted that FTTP coverage costs remain at the lower end of its target £250-£350 per premise range, in line with previous periods, with build rate still guided to accelerate, with the near-term focus on unwinding backlog.
They said: "Our impression from talking with BT is that a build rate of c.3.5mln premises is anticipated for FY24. This would take total coverage to c.14mln premises. To bridge from there to the 25mln target in Dec 2026, Openreach would need to accelerate build rate to c.4mln premises pa. This is the level it has previously described as peak run-rate."
The analysts said the question is how to square BT’s guidance of accelerating build rate with lower group capex from FY24. At the half year, BT raised group capex guidance for FY23 to £5.0bn from £4.8bn, arguing that a tax refund is being reinvested in FTTP.
The Jefferies analysts said: "We understand that the backlog of part-complete FTTP coverage has built up substantially as a result of this investment. From FY24, BT is guiding that group capex will revert to £4.8bn pa, but that FTTP capex will not be declining.
"To square this circle, BT argues that capex focused on Huawei swap out should cease from FY24 (c.£150mln y/y saving) and copper legacy capex is now falling at an accelerating rate (-26% y/y in 1H FY23, on a base of c. £500mln in FY22). On top of that, Openreach’s new FTTP coverage of c.3.5mln premises in FY24 should be heavily focused existing backlog."
The analysts concluded: "The capex question may be more pertinent in FY25, by which time today’s backlog will be largely connected, and FTTP build will be more focused on new footprint. We will be looking for BT to explain what other legacy items might be dropping out of the capex perimeter by FY25."
Jefferies has a 250p share price target on BT Group, with the stock currently trading at 125.45p.