This blue chip’s share price has risen by around 50% in the past two years, so investors could be forgiven for wondering if now is a good time to take profits. But the telecoms giant has made a habit of beating expectations in the past – and it looks set to continue doing so.
Tip of the week: BT Group (BT-A, 277.5p), tipped as a BUY by The Daily Telegraph
Back in 2002, the City was sceptical about BT’s ability to survive without its mobile unit, which it had just sold off. But BT made a virtue of necessity, ignoring conventional wisdom and instead leading the way in fixed line and media (rather than fixed line and mobile) convergence. The group must now feel vindicated after the recent news that Telecom Italia is considering separating its fixed line and mobile businesses in favour of focusing on convergence between fixed line, broadband and media services.
The stockmarket has also consistently fixated on BT’s loss of business from its traditional, legacy fixed-line business. This has seen brokers effectively put the company on an ex-growth (or worse) rating and leave it to stew in its own juices.
But in reality, voice and internet dial-up now account for only 25% of BT’s business, with losses in this area more than made up for by advanced internet operations (such as broadband), corporate services and IT. To this end, BT has had some major contract wins, including a recent £10.5bn deal to manage Unilever’s firewall systems (as well as its voice, data and mobile requirements) over the next 76 months.
As a result, BT Global Services is the fastest-growing unit within the group, with sales now approaching 50% of the total. And there’s more to come.
In September, the division’s CEO, Andy Green, outlined plans to double revenues in the US, Japan, India and China to more than £1.5bn by 2008/2009, while Germany and Italy are each forecast to become £1bn operations.
At the same time, its cost base is to be cut by £400m by slashing procurement costs and using more staff in low-cost countries, such as India. So while BT is holding its own in the cut-throat UK broadband environment, the domestic market is becoming ever more irrelevant as the group turns into an IT services giant comparable to EDS or Capgemini. Recently, BT has also attracted investors speculating on further consolidation in the telecoms sector – it has been tipped as a potential partner for Vodafone, Deutsche Telekom, and even BSkyB. Any one of these deals may or may not come off – but in most cases, the size would be so huge as to virtually preclude any rapid conclusion to a deal.
In the meantime, BT’s shares trade on a decidedly ex-growth multiple of 12.6 times 2008 earnings with a (well-covered) dividend yield of 5.2%. For a company that’s growing, not in decline, that seems unfair. Half-year results are due to be announced on 9 November.
Recommendation: still a long-term BUY at 277.5p