JPMorgan stays positive on BT, downplays Sky deal with CityFibre

JPMorgan has reiterated its 'outperform' rating on BT Group despite competition concerns hitting the stock following the announcement that Sky has signed a wholesale deal with CityFibre.

BT's share price dropped more than 6% on Tuesday to settle at 136.3p after competitor CityFibre announced a long-term broadband partnership with Sky, which will see the latter offer its broadband to people on CityFibre’s nationwide full fibre network.

Sky’s full fibre broadband is expected to be available on CityFibre’s full fibre network from next year. Longer term, this will include more than 1.3m homes in hard-to-reach areas through CityFibre’s participation in the government’s Project Gigabit Programme.

However, JPMorgan said the news shouldn't come as a surprise to BT shareholders. "There has long been speculation Sky would sign a deal with either VMO2 or CityFibre. We consider this a natural step as Sky looks to preserve its negotiating power and maintain strategic flexibility," said analyst Akhil Dattani.

Dattani pointed out that only 1.5m of CityFibre's total 3.8m-home footprint overlaps with BT's coverage at 15m homes, and that the hard-to-reach areas CityFibre is targeting are only expected to see "limited build from BT".

"Investors have long struggled with trying to model how the UK Fibre landscape will evolve, and what this means for BT’s future fibre returns (the core driver of its investment case)," Dattani said.

While the Sky deal will likely deal a blow to BT, the bulk of line losses are likely to come at the expense of Virgin Media O2 due to the areas in question, the analyst said. JPMorgan already predicts that BT Openreach's 70% network penetration will fall to 60% over the long term anyway.

"Hence we believe any material sell-offs [at BT] should always be seen as buying opportunities and we remain confident in our 290p target price (110% upside potential)," Dattani said.