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BT dodges bullet as analysts see government's full-fibre broadband pledge as positive

“Yesterday’s government infrastructure review moved the regulatory debate forward in a way that we think is supportive,” Jefferies said.
BT reports its first quarter results on Friday

The UK government’s proposals for full-fibre broadband are positive for BT Group plc (LON:BT), according to analysts.

The Department for Digital Culture, Media and Sport posted its Future Telecoms Infrastructure Review (FTIR) on Monday with a plan to replace the UK’s ageing copper lines with faster and more reliable fibre optics.

The department said full-fibre broadband should be available to all UK homes by 2033, adding that it would support investment in the most difficult-to-reach areas. It wants full-fibre to reach 15 million premises by 2025 and 5G mobile network coverage to reach the majority of the population by 2027.

The review stressed that it was the government's view that Ofcom should prioritise investments over interventions to further reduce retail prices.

BT’s Openreach division hopes to build a faster fibre broadband network for three million premises by 2020 and for 10 million premises by 2025.

READ: BT expects hit to Openreach earnings as it offers discounts for faster broadband

To incentivise other telecoms firms to use the new superfast network, BT plans to offer them discounts.

Pros and cons of infrastructure review for BT

“Our 'first reaction' view is that the contents of the government's FTIR are very clearly positive for BT,” said Numis.

The broker said the proposals will reduce costs and barriers to investment. It will also promote "stable and long-term investment" since the government has suggested Ofcom reviews telecoms markets every five years instead of the three, Numis added.

Numis maintained a ‘buy’ rating on the stock and a target price of 325p.

Barclays believes the suggestion of increased regulatory certainty and rural subsidies “should be taken positively” for BT. 

However, the bank noted that the government has suggested telecoms firms be given access to dark fibre in areas where duct and pole access is not possible.

The right of access to Openreach ducts and poles is currently restricted to networks used primarily to deliver broadband to small offices and homes. The FTIR said Ofcom should consider removing these restrictions on use “as soon as possible".

Barclays said for BT this risks loss of infrastructure market share, especially on its current fibre rollout, with alternative providers likely to “seize on the investment opportunity, setting up a likely land grab”.

Jefferies thinks BT will benefit from the FTIR since it creates a sense of urgency for upgrading the UK’s broadband infrastructure, recommends deregulation that will free Openreach from the prospect of price controls and gives priority on investment over interventions in retail prices.

 It left its rating on BT at ‘buy’ but raised its target price to 250p from 245p.

“Yesterday’s government infrastructure review moved the regulatory debate forward in a way that we think is supportive,” it said.

BT first quarter results preview

BT reports its first quarter results on Friday and Jefferies believes the focus will be on the company's business and public sector (BPS) arm following a weak performance.

“A more stable BPS trend is the key objective. If BT can navigate 1Q without consensus needing to downgrade, its estimated 8% equity free cash flow yield will look a lot more appealing,” Jefferies said.

Earlier this year the company said it was merging the business and public sector divisions to create an enterprise unit as part of a wider overhaul.

BT is also trying to attract new customers to boost its consumer division by launching new packages that combine broadband, mobile and pay-TV as a single service and bill.

Meanwhile, the telecoms giant has said it expects the adoption of a new IFRS 15 accounting standards to have an “adverse impact” on this year’s results.

READ: BT expects “adverse impact” from adoption of new accounting standards

“Key focus will be BPS where IFRS 15 earnings (EBITDA) declines accelerated during fiscal year 2017/18 (from -3.4% year-on-year in the first quarter to -8.8%/-11.0%/-13.0% in the second quarter, third quarter and fourth quarter respectively),” Jefferies said.

“We forecast a sharp improvement (-4.6% year-on-year at £326mln) this quarter as the (high-margin) lost public sector contracts mostly lap out of compartives. This step-change should inject confidence that consensus forecast of flat BPS EBITDA for 2018/19 (Jefferies estimates -1.6%) is credible.”

BT expects the discounts it is offering wholesale customers to use the upgraded fibre network to results in an impact to Openreach revenues and earnings in the “high tens of millions of pounds”.

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