Is BT’s purple patch coming to an end?

One leading analyst thinks the stock is ‘overcooked’ – here’s why.

The reversal of fortunes for BT (LSE:BT.A) shares after a 80% rebound since November was called into question today when a leading telecoms analyst downgraded the stock to ‘sell’.

Deutsche Bank's Robert Grindle believes the shares are looking “overcooked” at 180p. He also thinks the market appeared overly exuberant following the company's pledge to “build like fury” in order to roll out ultra-fast internet speeds to 25 million buildings by December 2026.

Chief executive Philip Jansen made his vow after Ofcom confirmed a light-touch approach that will leave BT's Openreach arm free from cost-based price regulation for 10 years.

Chancellor Rishi Sunak's super-deduction capital investment tax break, a better-than-expected outcome on the triennial pension deficit and lower costs in the recent 5G spectrum auction have also helped shares recover from less than 100p in November.

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They had been pummelled in 2020 after Jansen was forced to axe the dividend and rebase expectations, despite the working-from-home trends created by the pandemic.

Grindle views the wider European telecoms sector as cheap, but expects BT to underperform any wider rally, believing that the FTSE 100 stock is worth no more than 140p. Shares fell 3% to 175p following the downgrade to a ‘sell’ recommendation.

He said: “We are chiefly concerned that the market has become overly exuberant with regard the prospect for unregulated returns on fibre to the premises.”

Grindle warns that BT will experience competition from fixed infrastructure rivals for the first time across half its footprint, rendering the prospect of unregulated returns as moot.

He notes that fixed-mobile convergence may become more prevalent following the Virgin Media-O2 merger and that Three could be tempted to offer broadband over either 5G or through the proliferation of alternative fibre-to-the-home (FTTH) providers.

Deutsche's own research suggests that the rate of FTTH build by providers such as CityFibre and HyperOptics is gaining traction, reaching about one million homes in 2020 and set to double this year.

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Grindle points out that Sky, TalkTalk and Vodafone (LSE:VOD), who together account for more than 40% of retail broadband, may direct their business away from Openreach not least to encourage diversity of infrastructure supply and to improve economics.

BT's updated investment plans, disclosed alongside last month's annual results, envisage a further doubling of build momentum to a peak of four million homes annually, described by management as “building like fury”.

Jansen said last month: “After a number of years of tough work, and as we look to build back better from the pandemic, we’re now pivoting to consistent and predictable growth.”

The CEO's guidance for 2021/22 points to a resumption of the dividend at an annual rate of 7.7p a share, amid expectations that capital expenditure will rise to £4.9 billion from £4.2 billion the year before. Free cash flow will be between £1.1 billion and £1.3 billion.