Jefferies downgrades BT on impaired visibility

The bank said BT's outlook is increasingly uncertain, with more elements outside management control.

Jefferies said the positive stance it had established on the stock back in 2010 was founded on benign regulation - helping BT regain consumer retail momentum - and substantial cost-cutting.

“With neither support looking so reliable now and valuation no longer cheap, we downgrade,” it said, adding that Vodafone is its preferred UK telco.

Jefferies said Ofcom’s attitude towards BT appears increasingly abrasive. Demands in last month’s Business Connectivity Market Review for tougher minimum service standards and a new dark fibre reference offer will load Openreach with more cost.

At the same time, Ofcom’s Cost Attribution Review will reduce the cost base on which it is entitled to earn a return.

Jefferies said Ofcom’s Digital Communications Review proposals were still a threat.

“Although initial conclusions fell short of demanding structural separation, the “independent governance” that Ofcom seeks for Openreach might extend to giving it control over cash flows that contribute significantly to BT’s dividend capacity.”

The bank noted Openreach contributed 36%-41% of group operating cash flow in the last four years.

At 0948 BST, BT shares were down 2.2% to 441.10p.