The telecoms giant is on the road to recovery, but fully priced for now, says Phil Oakley
What is BT?
BT is the largest fixed-line telecoms company in the UK. It has four main business units. BT Retail sells fixed-line telephone, broadband and TV services to homes and small businesses. BT Wholesale provides fixed-line products and services to other communication providers. Openreach is responsible for connecting copper wire and fibre-optic lines from homes and businesses to the local telephone exchange. Global Services provides networked IT services to multinationals, governments and other communication providers in more than 170 countries.
What’s the company’s history?
BT has had a chequered past since being privatised in 1984. Its traditional phone services have faced strong competition, while it ultimately failed to create a global telecoms business. The end of the dotcom boom saw BT saddled with debts that resulted in a £5.9bn rights issue, the sale of its directory business and the demerger of mmo2, its mobile-phone unit. Loss-making contracts at its Global Services unit and a large pension fund deficit saw a hefty dividend cut in 2009. Since then, the group has refocused its business strategy while cutting costs and improving cash flow.
How’s trading?
Last year, £1.1bn in cost-cutting helped operating profits grow by nearly 12% to £2.9bn, despite revenues falling by 4%. Cash flow improved by 4% to £2bn and the pension fund deficit (a key concern for investors) fell from £5.7bn to £1.4bn. This allowed BT to lift its dividend by 7%. While falling revenue reflected an intensely competitive UK market, BT’s broadband growth was the highest for eight years while the order book at Global Services increased by 10%.
What’s the outlook?
Management expects another year of revenue decline before a return to growth in 2012/13, helped by further cost-cutting. But in the longer run, BT needs to get revenues growing again. A key driver will be its high-speed, fibre-optic broadband service (BT Infinity), which aims to cover two-thirds of UK households by 2015. This will enable BT to offer more broadband products such as live gaming. But whether it will boost revenues or is necessary just to retain existing customers remains to be seen.
Who runs BT?
Ian Livingston has been chief executive since 2008, having been CEO of BT Retail and group finance director. In 2010, he was paid £2.1m, from £1.2m in 2009. Chairman is Sir Michael Rake, also chairman of easyJet. Finance director is Tony Chanmugam.
The analysts
Of the 29 analysts surveyed by Bloomberg, 50% have ‘buy’ recommendations, 28% say ‘hold’ and 22% are sellers. The average 12-month target price is 210p. Jean-Michel Salvador of AlphaValue is the most bullish, with a price target of 275p, while the biggest bear is Guy R Peddy at Macquarie Capital, who has a target of 110p. Our view: while BT offers a solid 4% yield, the shares, which have appreciated by 50% during the last 12 months, look fairly priced, given the absence of revenue growth.
The numbers
Stockmarket code BT.A
Share price: 193p
Market cap: £14.98bn
Annual sales (March 2011) £20.07bn
Net assets (last stated) £1.95bn
Net debt (last stated) £8.82bn
P/e (current year estimate) 9.1
Yield (prospective) 4%
Largest shareholder: Invesco, 21.5%
Directors’ dealings
There have been no major purchases of shares by BT’s executive directors during the last year. Additions to the directors’ shareholdings have come from the reinvestment of dividends and the transfer of shares from deferred bonus plans. These have largely been offset by share sales. CEO Ian Livingston is the biggest shareholder among thedirectors, currently holding 1.16 million shares, followed by BT Retail CEO Gavin Patterson, on nearly 440,000. Tony Chanmugam holds 225,000 while chairman Sir Michael Rake holds 110,000.
Director and shares bought in 2011 (net)
Sir Michael Rake: 1,348
Ian Livingston: 71,032
Tony Chanmugam: 0
Gavin Patterson: 30,292