BT’s downgrade cycle is in the past and a ‘major rerating’ is called for, JP Morgan said as the bank increased its price target for the telecoms group’s shares and reiterated its ‘overweight’ rating.
The FTSE 100 company has suffered major downgrades over the past five years but Openreach, its network division, will power upgrades as earnings surge, JP Morgan said.
BT’s earnings before interest, tax, depreciation and amortisation have fallen 16% to £7.4bn in the past half decade and operating free cash flow has plunged 45% to £3.3bn. But earnings are now forecast to revive to more than £7.9bn by March 2023, allowing cash flow to revive even as spending on fibre increases, JP Morgan said.
Openreach’s asset base will grow from £14bn today to a peak of £23bn in the medium term, supporting a £1bn increase in the unit’s earnings in the long run. BT’s equity free cash flow will more than double to £3.3bn in 2031 from £1.3bn now, the bank predicted.
“Whilst such growth might seem heroic, note this simply restores EFCF back to levels last seen as recently as in 2017,” JP Morgan analyst Akhil Dattani said in a note to investors.
Dattani increased his price target for BT shares to 230p from 175p based on an increased forecast of 19.31p earnings per share for 2022 and a £22bn sum of the parts valuation for Openreach. Though BT shares have gained 50% since October as investors have woken up to its prospects the shares are still 70% below their 2016 high of £5 a share, he added.
Dattani said catalysts for the shares to make gains include annual results, a pension update and lower costs in a Premiership rights auction. But he said a substantial rerating needs BT to convince investors of the long-term upside from fibre.
Private equity is increasingly interested in fibre and an option would be for BT to sell a stake in Openreach to demonstrate its value and to collateralise a stake with its pension fund to reduce costs.
