HSBC has downgraded BT Group, citing potentially “major shifts” in the wholesale broadband market.
The bank, which has cut its rating to ‘reduce’ from ‘hold’, also lowered its target price, to 125p from 135p.
HSBC said that the wholesale broadband market – which BT dominates through its Openreach unit – had been stable for two decades, but change was now on the horizon.
It said: “BT’s ambition and its investment plans are unquestionably bold. The company and its networks are set to be transformed within five years, creating much opportunity, in our view.
“And yet at this stage, the BT investment case rests largely in the hands of others. Specifically, the extent to which Virgin Media O2 decides to wholesale its network and whether Sky decides to use that network. This moves the crux of the debate to the potential for substantial shifts in the long-term wholesale broadband market – a topic that was off the radar until recently, but is now of significantly importance, in our view.”
HSBC said it believed Virgin Media O2 would look to wholesale any FTTP (fibre to the premises) it builds, adding: “All our scenarios entail some wholesale market share loss for Openreach, but we are also assuming that Sky remains a customer, just a smaller one.”
Looking ahead to the blue chip’s interim results, due next month, the bank concluded: “BT is set to provide an update on the potential to establish a joint venture to finance FTTP past 5m rural premises.
“Should such a deal be announced, the market may look to the implied valuation for the whole of Openreach, but we think that any over-excitement would be premature, not least because any valuation would be subject to the same downward revisions if wholesale competition were to materially increase.”
As at 1200 BST, shares in BT were off 1% at 143.55p.