BT raised to ‘Top Pick’ by Morgan Stanley amid faster fibre rollout, FCF growth
The brokerage notes that while BT’s near-term financials look subdued, with revenues down 2% year-over-year, EBITDA flat, and free cash flow declining 6%, the outlook improves by fiscal 2027, with revenue steady, EBITDA up 1%, and free cash flow rising 33%.
The upgrade follows BT’s fiscal 2025 results in May, which improved free cash flow visibility.
Near-term capital expenditure is about £100 million higher than expected, reflecting an accelerated fibre rollout.
By March 2026, BT will have connected fibre to over 23 million homes, nearly 80% of U.K. households, providing clear visibility that capex will ease thereafter, supporting a faster free cash flow recovery.
Morgan Stanley highlights market repair as a potential catalyst. Fibre network competition is shifting from aggressive expansion to consolidation.
Altnets face funding challenges and weak customer uptake, only 10-20% versus Openreach’s 36%, suggesting they may scale back ambitions.
The upcoming U.K. mobile merger could reduce consumer market competition, benefiting BT and its EE mobile unit, which hold a competitive advantage in network investments.
Portfolio restructuring remains ongoing. After selling businesses in Ireland and Italy, BT plans to optimize its global international B2B business, which has been a long-term drag and source of profit warnings.
Management is considering partnerships, disposals, or focusing on cash by winding down unprofitable contracts. The 50/50 joint venture in TNT Sports may also be sold, according to unconfirmed press reports.
On ownership, Bharti acquired a 24.5% stake in November 2024, with potential for an increase. Carlos Slim holds 3-4%, and Deutsche Telekom (OTC:DTEGY) maintains a steady 12% stake since 2015.
Valuation looks attractive, with shares trading at an 8x price-to-earnings multiple and 10% free cash flow to equity yield for fiscal 2027.
At the 240p target, the 2026 P/E is 11x with an 8% FCFE yield, considered reasonable over a 10-year horizon.
Risks include slower-than-expected progress at Global and U.K. macroeconomic volatility, especially rising gilt yields that could increase BT’s pension deficit valuation pressures.
