Berenberg downgrades BT to 'hold' following material rerating

Analysts at Berenberg downgraded telecommunications giant BT Group from 'buy' to 'hold' on Thursday, stating the firm's shares had "materially rerated" since upgrading the stock back in August 2020.

Berenberg highlighted that BT's share price had increased 75% since the upgrade, outperforming the STOXX Europe 600 telecommunications index by 50%, and after a busy first-half to the calendar year, with lots of events to cause the rerating, its analysts do not believe that there were as many positive catalysts to come.

"As such, we struggle to justify putting BT's investment case ahead of others, in a sector that offers many 'cheap' stocks," said Berenberg, which did raise its target price on the stock from £1.65 per share to £1.75 each.

The German bank pointed to four reasons to now adopt a "more cautious stance" on BT. Firstly, it said BT had "challenging guidance" for the next two years, particularly its "at least £7.9bn" in underlying earnings in 2022/23, meaning that prospects for any material "beat and guidance raise" were limited.

Secondly, it said the merger of Virgin Media and O2 UK, due to complete in coming weeks, may increase investor concerns around the long-term threat of overbuild.

It also stated the outcome of ongoing talks between BT and the Communications Workers Union remained uncertain, but noted it would not be surprised by either an agreement that was presented in such a way as to appear to limit cost-cutting, or alternatively, by increased strike action.

Lastly, Berenberg acknowledged that Ofcom was due to publish a consultation later in the quarter on annual licence fees for the 2100-megahertz spectrum.

"We believe that new incremental opex of £30m-40m pa is likely from January 2022. While comparatively small, we still believe that this consultation could remind investors that future EBITDA headwinds remain," concluded Berenberg.