RBC downgraded the stock to ‘sector perform’ from ‘outperform’ and lowered its target price to 275p from 385p.
In reaction, shares fell 1.7% to 219p in late morning trading.
“Although BT is underpinned by a 8% free cash flow yield, a 7% dividend, and potential convergence benefits, we see few catalysts to re-rate the stock in the next 12 months," RBC said.
Lack of catalysts
RBC pointed out that BT is yet to confirm a replacement for outgoing chief executive Gavin Patterson, who leaves at the end of the year.
The broker thinks BT’s strategic position could allow it to use convergence to stop line loss and neutralise the threat from alternative networks but the company’s attitude of “safety first” and incremental approach mean this is likely to take several years before it becomes mass market.
BT’s convergence plans involve combining broadband, mobile and pay-TV as a single service and bill.
RBC also highlighted that BT expects a £1bn headwind over the next three years as a result of stricter regulation that forces the company to lower wholesale prices for its Openreach network.
This will mean lower input prices for competitors, allowing them to cut retail prices to compete with BT.
New KPIs 'may cause concern'
RBC said BT's new key performance indicators that it will use from the first quarter of 2019, do not provide details on broadband or mobile net adds.
“While we understand the desire to move away from 'net adds' as the market matures, not disclosing such important metrics may cause concern, given the widely held sceptical view that companies tend to obfuscate bad news,” RBC said.
“Indeed, reduced disclosure often, in our view, portends badly for future operational performance.”
Dealing with overhanging issues
More positively, BT has navigated through a period of regulatory uncertainty.
The company has settled its dispute with the Ofcom over the structural separation of Openreach and survived the government’s Wholesale Local Access review.
Another issue BT has dealt with is its pension scheme. Following the completion of its triennial pension review, it is swapping £2bn of pension deficit for financial liabilities via a bond issue to the scheme.
"BT has successfully dealt with a number of issues that have been overhanging the stock for the past 18 months," RBC acknowledged.
It added: "Having done the "hard yards", and with a 7% dividend, one could expect some easing of the environment and a potential relief rally (esp. if defensive stocks come back into vogue). However, we are hard pressed to find any catalysts that could cause the market to reassess BT's prospects in the next 12 months."