Sign up Australia
Proactive Investors - Run By Investors For Investors

BT could benefit as Ofcom displays softer stance on regulatory plans, say analysts

Ofcom has demonstrated muddled thinking on its plans to cut Openreach's wholesale prices, Numis said
BT
BT has received mixed reviews from analysts

BT Group plc (LON:BT.A) may benefit from Ofcom’s intention to make sure telecoms regulation supports investment in the UK’s fibre infrastructure, analysts said.

Shares in BT rose 1.20% to 285.60p in morning trading. 

The telecoms watchdog provided an update on its regulatory thinking yesterday in a meeting, saying that fibre to the premises (FTTP) is a 10-year investment in the UK that requires multiple operators.

FTTP provides an end-to-end fibre optic connection from the telephone exchange to the building and delivers faster speeds than fibre-to-the-cabinet (FTTC) as there is no copper cable.

“Given the limited current rollout we believe there is ample room for BT and third-party operators to roll out networks,” said analysts at Macquarie.

Macquarie said BT remains its top pick among European large-cap operators and repeated an ‘overweight’ rating and target price of 355p.

Ofcom chief executive, Sharon White, and strategy group director, Dr Steve Unger, supported a model where BT’s network Openreach accessed and resold third-party FTTP and BT’s retail division could act like any other service provider.

“In our view, Ofcom was very pragmatic and is keen to see an increase in FTTP builds, ensure the economics of third-party network investment are sustainable and improve customer service levels,” Macquarie said.

Macquarie added that the regulation of entry level broadband is a "step change" but there is no intention to regulate higher speeds or fast and FTTP.

READ: BT shares gain after Ofcom forced to revisit rules on broadband market

Ofcom displays 'muddled thinking'

Numis said Ofcom has displayed “muddled thinking” on its plans to cut Openreach’s wholesale prices for FTTC. 

During Ofcom’s meeting yesterday, competition director Jonathan Oxley said there was no evidence that cutting the price of the most popular FTTC will pressure the price of higher speed services and therefore hurt investment in Britain’s fibre infrastructure.  

FTTC involves running fibre optic cables from the telephone exchange to street cabinets, which then connect to a standard phone line to provide broadband using a copper cable.

Yet in Ofcom's consultation document on Openreach wholesale prices in March, the regulator said it believes there will be “fairly strong substitutability” between different superfast broadband services that are currently being delivered by fibre and cable.

It said this would pose a “constraint on the higher speed services being developed using new technologies”, including ultrafast speed broadband services.

In contrast Oxley said BT's "fair bet" investment in FTTC has paid off and ignored Virgin Media Inc's (NASDAQ:VMED) written submission to Ofcom, which said: "Why would the fact that BT had passed its expected payback date on its FTTC investment mean that charge controls now [e.g. cutting the price for 40/10Mbps upload speed FTTC] would have no impact on competitor investment incentives?".

A decision on its proposal to cut Openreach’s wholesale price for FTTC on upload speeds of 40Mbps download/10Mbps by 21-56% between 2019 and 2021 will be made in early 2018.

READ: Charges 'mounting' up at BT, but it may not be all doom and gloom

Ofcom's wholesale price cut will be less than the midpoint of range proposed, says Numis

Numis said these stark contrasts on the proposal show Ofcom is "not sure-footed" on the issue and reiterated its view that the actual cut will be “meaningfully less than the midpoint (41%) of the range being consulted on currently.”

The broker believes this is bullish for BT at the current share price and repeated a ‘buy’  rating and target price of 390p.

Virgin Media is opposed to the proposal as it believes it could lead to Openreach freezing spending on all core and alternative ultrafast networks in Britain

“This matters because Ofcom’s core aim remains to effect investment in scale, alternative all-fibre networks; the Digital Economy Act 2017 now compels Ofcom to facilitate the government’s strategy to maximise spend on Britain’s allfibre infrastructure; Virgin Media remains by far the biggest investor in alternative ultrafast connectivity; Virgin Media believes Ofcom’s proposal will chill spend on all (core and alternative) ultrafast networks in Britain; Virgin Media thinks its parent, Liberty Global, may as a result of Ofcom's proposal switch investment from the UK to elsewhere in Europe,” Numis said.

Ofcom remains committed to plans, says Deutsche Bank

Deutsche Bank, however, took a different view on Ofcom’s meeting. The bank believes Ofcom remains committed to improving competition and will stay on the path laid out initially in its consultation document for cutting wholesale prices.

“On criticism of squeezing BT, Ofcom replied that is not a rate of return regulator but is incentive based,” the bank noted.

“Though as it happens BT is making regulated returns, materially higher than its WACC (weighed average cost of capital )so there is room for squeezing but rate of return regulation is not the long-term approach.”

Deutsche Bank maintained its ‘sell’ rating on BT and target price of 265p.

 





Register here to be notified of future BT.A Company articles
View full BT.A profile View Profile

BT Group plc Timeline

Article
February 02 2016
Newswire
January 15 2016

Related Articles

1504096349_shutterstock_420468130.jpg
August 30 2017
It also confirmed it expects growth for the full-year to be in line with market expectations

No investment advice

The information on this Site is of a general nature only. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions. You acknowledge and understand that neither the Company, its related bodies corporate, the information providers or their affiliates will advise you personally about the nature, potential value or suitability of any particular security, portfolio of securities, transaction, investment strategy, or other matter. You should read our FSG and any other relevant disclosure documents and if necessary seek persona advice prior to making any investment decision.

You understand and agree that no Content (as defined below) published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable or advisable for any specific person.

You understand that in certain circumstances the Company, its related bodies corporate, the information providers or their affiliates may have received, or be entitled to receive, financial or other consideration in connection with promoting, and providing information about, certain entities on the Site and in communications otherwise provided to you.

You understand that price and other data is supplied by sources believed to be reliable, that the calculations herein are made using such data, and that neither such data nor such calculations are guaranteed by these sources, the Company, the information providers or any other person or entity, and may not be complete or accurate. From time to time, reference may be made in our marketing materials to prior articles and opinions we have published. These references may be selective, may reference only a portion of an article or recommendation, and are likely not to be current. As markets change continuously, previously published information and data may not be current and should not be relied upon.

Before you act on any general advice we provide, please consider whether it is appropriate for your personal circumstances.

© Proactive Investors 2017

Proactive Investors Australia PTY LTD ACN:132787654 ABN:19132787654.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use