Buy the BT dip? … JP Morgan’s analysts reckon this week’s price drop is an opportunity
BT Group’s (LSE:BT.A) heightened competition in the UK broadband market ‘should not come as a surprise’, not according to London-based analysts at JP Morgan.
Sky’s team up with CityFibre, which on Tuesday spooked BT investors, looked like “a natural step” as the TV and communications operator sought to preserve its negotiating power and maintain strategic flexibility, JPM’s Akhil Dattani said in a note.
“We expect Sky to use it primarily to expand its fibre coverage rather than migrate away from BT,” the analyst commented.
He added: “Investors have long struggled with trying to model how the UK Fibre landscape will evolve, and what this means for BT’s future fibre returns (the core driver of its investment case).”
At JPM, the analyst team reckons erosion of market share is already priced. “Hence we believe any material sell-offs should always be seen as buying opportunities and we remain confident.”
JPM remains bullish on BT, with a price target of 290p which suggests around 110% upside to Wednesday’s closing price of 134.80p
Elsewhere, analysts at UBS rate BT as a ‘sell’ with a 12-month price target of 110p, and also highlighted the likelihood of further competition coming from Virgin Media, amidst a potential revisit of its M&A combination with TalkTalk.
“With CityFibre wholesale pricing 20-30% lower than Openreach, we would expect Sky to migrate all of its subscribers within the CityFibre footprint away from Openreach over time,” UBS analyst Polo Tang said in a note.
Tang added: “We estimate the potential impact from the Sky/CityFibre deal will be -£120m of high margin wholesale revenue medium term. With BT paying no UK taxes, the revenue loss drops straight through to free cashflow (FCF) representing a -7-8% impact on BT normalised FCF medium term.”
Share price in decline
On Tuesday, BT shares closed more than 6% lower and the losses extended by another 1% on Wednesday.
It came after BT’s old rival Sky once reignited competition with its new team-up with CityFibre, putting down the gauntlet in BT’s telecoms arena.
Sky and BT were fierce competitors through the broadband and pay-TV bundling era, but the rivalry cooled in recent years after UK watchdogs pushed the companies to strike reselling partnerships to allow both sets of TV packages to be available to all customers on the respective platforms.
The subsequent sale of BT Sport to TNT, a brand under the Warner Bros Discovery umbrella, further eased the competitive tensions.
That was until today, as Sky announced a long-term partnership with CityFibre to offer broadband services through CityFibre’s network starting next year.
It aims to give Sky the capacity to expand its broadband services via CityFibre’s network, especially in rural areas.
BT’s Openreach currently provides broadband infrastructure for Sky’s 5.7 million customers.
Meanwhile, CityFibre’s network aims to cover 8 million premises.
City analysts reacted by noting that while CityFibre’s current reach is smaller than Openreach’s, the growing competition could pressure BT to reconsider its pricing and service strategies.
In a statement, meanwhile, CityFibre chief executive Greg Mesch described the partnership as a strong endorsement of the company’s position as the UK’s third-largest digital infrastructure provider.
