BT shares receive another big vote of confidence

Many market participants are liking BT right now, and today a City big hitter joins the list.

Investors wanting to know if BT (LSE:BT.A) shares are finally over the worst were given some food for thought today when a long-standing City critic removed its 'sell' recommendation.

Deutsche Bank has advised against BT shares for most of the duration of the telco's five-year descent to just above 100p, including before May's annual results in which BT axed its final dividend for the first time since it was privatised in 1984.

There was a softening in the approach of Deutsche analyst Robert Grindle today when he raised the bank's longer-term underlying earnings estimates, and said BT's valuation now looked more reasonable versus its peers.

Risks remain, but the City firm has switched its recommendation from 'sell' to 'hold' and increased its target price by 15p to 125p.

Shares at this level would be a step in the right direction for BT's army of long-suffering retail shareholders, who have seen the stock slump to a decade low on concerns about how debt-laden BT will fund the rapid roll-out of full fibre broadband to 20 million homes.

The shares were slightly lower at 110p this afternoon, close to where they were after annual results a fortnight ago revealed that the group won't be paying a dividend until 2022 - and then only at half the level of last year's payout.

Source: TradingView. Past performance is not a guide to future performance.

With the bad news on the dividend out the way, plenty of investors now regard BT shares at a multi-year low as a good time to buy. They include CEO Philip Jansen, who snapped up £2 million of shares after the results, as well as many interactive investor clients.

BT has been the second most bought stock on the ii platform over the past fortnight, behind only Lloyds Banking Group (LSE:LLOY). Our own companies analyst Edmond Jackson also wrote this week that BT shares have the potential to climb the 'wall of worry'.

While such optimism is not shared yet by Deutsche, the bank thinks that BT's commitment to deliver full fibre to 20 million homes by the mid-to-late 2020s will be a good thing for its long-term future if it means a more resilient and cheaper to maintain network.

There should also be lower customer churn, while the faster and further BT builds the less likely it will be to suffer market share loss to alternative fibre providers. BT's capital expenditure expectations have been raised by £600-700 million as a result, but this is the same as the proposed cut to the dividend from 2022.  

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Deutsche said: “The decision to invest in fibre was delayed in favour of maximising returns and near-term growth including the investment in exclusive sports content.

“Other incumbents invested in fibre and suffered from cashflow and share price depletion — BT is now just catching up with stuff the rest of the sector has been dealing with.”

The bank believes that the European telecoms sector remains cheap overall, with the increasing value of infrastructure one of the best reasons for a re-rating.

However, it sees BT as less of a beneficiary due to a stake sale of its Openreach division not being attractive or feasible at the current time.  

Other downside risks include market share loss if Virgin Media's proposed merger with O2 accelerates convergence trends.