UBS warns BT’s free cash flow target looks unachievable as altnet competition bites Proactive uses images sourced from Shutterstock
UBS has reiterated its ‘sell’ rating on BT Group PLC (LSE:BT.A) with a revised price target of 175p, up from 140p, arguing that persistent revenue declines will prevent the telecoms giant from hitting its long-held target of £3 billion in annual free cash flow by the end of the decade.
The investment bank raised its target purely to reflect a broader re-rating of the European telecoms sector rather than any improvement in BT’s fundamentals, and forecasts the stock will fall around 19% from its current level of 216p over the next 12 months.
At the heart of UBS’s bearish case is the state of Openreach, BT’s wholesale broadband network business, which rents access to its cables and infrastructure to rivals including Sky and TalkTalk.
The UK is the most competitive broadband market in Europe, with so-called altnets, the independent fibre builders such as CityFibre and Netomnia, now covering approximately 65% of UK homes and offering wholesale pricing 20-30% cheaper than Openreach.
UBS forecasts Openreach will lose around 800,000 broadband lines a year over the coming two years, with its share of the broadband infrastructure market declining from around 60% currently to 50% in the medium term.
The bank also flags a potential £330 million revenue headwind from the decline of legacy voice services, as fewer broadband customers choose to add a fixed telephone line to their package, with the attachment rate already falling from 76% in 2024 to 69% in 2025.
A further complication arises from BT’s shift to so-called Pounds and Pence contracts, under which customers receive a fixed annual price increase rather than one tied to inflation.
The change created an accounting benefit of approximately £55 million a year through the financial years ending March 2025, March 2026, and March 2027 by pulling forward revenue recognition.
But, UBS calculates this will become a headwind of up to £165 million in the financial year ending March 2028 as the same accounting effect reverses.
On free cash flow, UBS forecasts BT will generate approximately £2 billion in the financial year ending March 2030, sharply below the company’s own guidance of £3 billion and consensus forecasts of £2.8 billion.
This will be driven by ongoing revenue declines offsetting the significant savings from winding down its fibre-building programme.
Credit rating constraints are also expected to limit dividend growth, with BT’s leverage ratio of 3.2 times adjusted earnings sitting close to the upper end of the range required to maintain its current investment-grade credit rating.