Fixed-line Decline And Openreach Losses Will Dampen Future Outlook

Key Takeaways

• Core fixed-line businesses face structural revenue decline and persistent ARPU pressure due to changing customer behavior and intensifying industry competition.
  
• High regulatory, security, and legacy infrastructure costs, along with pension and debt burdens, pose significant risks to profit margins and future earnings flexibility.
  
• Accelerated fiber and 5G rollout, cost transformation, infrastructure investment, and modernization initiatives position BT for revenue growth, margin expansion, and increased shareholder value.

Catalysts

Provides communications products and services in the United Kingdom, Europe, the Middle East, Africa, the Americas, and the Asia Pacific.

• BT Group's core fixed-line revenue streams face persistent long-term decline as customers increasingly shift to mobile and wireless-first connectivity. Despite short-term fibre growth, the secular pivot away from traditional fixed services is likely to depress long-term revenues and ARPU, particularly as Openreach continues to lose broadband lines in a market where net household growth is not guaranteed.
  
• The company must absorb escalating compliance and security costs due to heightened cyber threats and increasing regulatory scrutiny on data privacy. With legacy infrastructure still present and large-scale migrations ongoing, ongoing investment requirements and possible penalties could significantly compress net margins and limit sustainable earnings growth.
  
• Structural challenges from high pension liabilities and substantial debt servicing commitments will continue to weigh on free cash flow. As rising global interest rates elevate BT's cost of capital, its ability to fund large infrastructure rollouts and digital transformation becomes further constrained, undermining the group's long-term earnings flexibility and leverage profile.
  
• The slow migration off copper and legacy products, compounded by regulatory-imposed separation of Openreach and restrictive wholesale pricing, limits BT's ability to monetize infrastructure investments. As new wholesale agreements and competitive price dynamics cap upside, future EBITDA and margin expansion are uncertain and may lag expectations.
  
• Intensifying competitive forces from aggressive altnets, consolidation among UK and European telecom peers, and encroachment by non-traditional tech and cloud players will drive industry commoditization. This environment of persistent ARPU pressure and open infrastructure mandates threatens to erode BT's market share, restrict pricing power, and compress profitability well into the next decade.

BT Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on BT Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming BT Group's revenue will decrease by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.2% today to 7.4% in 3 years time.
• The bearish analysts expect earnings to reach £1.4 billion (and earnings per share of £0.04) by about July 2028, up from £1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 18.5x today. This future PE is lower than the current PE for the US Telecom industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

BT Group Future Earnings Per Share Growth

Risks

• BT Group's accelerated full fiber and 5G rollout, coupled with growing customer take-up and robust ARPU growth, positions the company to benefit from increasing demand for high-speed data, which could support revenue and boost earnings over time.
  
• Major cost transformation programs are ahead of plan, with substantial headcount reductions, automation, and operational simplification delivering rising EBITDA and margin expansion, strengthening net margin and operating cash flow.
  
• With record investment in UK digital infrastructure and a unique nationwide fiber footprint, BT is well-placed to capitalize on government and private sector commitments to connectivity and housebuilding, which may drive market share and revenue stability.
  
• The company's decisive progress towards significant free cash flow inflection-maintaining targets of £2 billion in FY 2027 and £3 billion in FY 2030-enables increased dividends and deleveraging, enhancing shareholder value and balance sheet resilience.
  
• Ongoing modernization, innovative AI use, and successful brand activation strategies across Consumer and Business segments are improving customer metrics and loyalty, providing a platform for sustained top line and bottom line growth as legacy declines subside.

Valuation

• The assumed bearish price target for BT Group is £1.18, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of BT Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.99, and the most bearish reporting a price target of just £1.18.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £18.9 billion, earnings will come to £1.4 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of £1.99, the bearish analyst price target of £1.18 is 69.0% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.