Interactive Investor

FTSE 100 hot stocks: what the City thinks of BT and 3i

23rd March 2023 15:56

by Graeme Evans from interactive investor

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These two companies have attracted attention recently, and City analysts have just issued new reports on the blue-chip pair. 

BT logo british telecom 600

Two of this year’s hottest FTSE 100 stocks have been backed to go further as City analysts deliver their verdicts on recent progress at BT Group (LSE:BT.A) and private equity firm 3i Group (LSE:III).

The companies are up by a fifth or more this year, with the widely held telecoms stock finally outperforming its peers after 2022’s dismal showing left shares near to 110p.

They recovered to 148p earlier this month and today stood in line with Deutsche Bank’s 140p target price, prompting the City bank to review its position with a new estimate of 150p.

The move alongside an uplift to earnings expectations was made as the prospect of inflation-linked consumer price rises offset pressure on BT’s business segment.

At the end of this month, BT will hit most of its customers with a 14.4% price hike based on a formula of CPI inflation plus 3.9%.

Analyst Robert Grindle said: “We wondered whether BT would 'lean in' to an approximate 14% price increase to consumers (10% to wholesalers) after a serendipitous (for BT) CPI out-turn, and it has.

“We have well publicised views as to the longer-term efficacy of such price action into a cost-of-living crisis and a massive alt-net build programme but BT's largest competitors are following suit on price rises (particularly on mobile) which should more than afray labour cost increases.”

Grindle remains cautious overall, however, as he believes there’s greater value upside elsewhere in the sector and with lower risk. Last week Ofcom delayed a decision on new pricing arrangements proposed by BT’s regulated Openreach arm.

The new terms for full-fibre broadband had been due to come into force on 1 April, but Ofcom said it needed another couple of months after a number of “detailed and extensive responses” to its consultation.

Earlier this week, Grindle backed Vodafone Group (LSE:VOD) shares to double to 185p as initiatives such as the consolidation of operations in Africa and decision to partially monetise the group's towers portfolio finally bear fruit.

The robust performance of 3i Group shares so far this year has been built on the continued momentum of the Benelux-based Action discount chain, which represents its largest asset.

Action has performed strongly since the early days of the Covid-19 pandemic, reaching its 2019 five-year plan target of one billion of underlying earnings more than a year ahead of schedule. An interim dividend in December resulted in a distribution of £159 million to 3i.

In a brief update today, 3i said Action’s strong trading had continued across all its geographies with like-for-like sales growth of 24.8% in the first 11 weeks of the year.

The business has added 23 stores in the year to date and Action is planning to make another dividend payment to shareholders next week.

Shares in 3i today rose 22p to 1591p as one of the best stocks in a weakened FTSE 100 index, leaving the company near to one-fifth higher so far this year. However, Bank of America believes a level of 2,000p is achievable.

The bank said: “We think there is useful upside to 3i at current levels, even assuming our current estimates on Action are not too low.

“We think it is best seen as a quality growth company, well placed to prosper in current conditions. Trading below our March book value estimate of 1,674p, we reiterate our Buy.”

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