BT Group plc (BT.A) Ordinary 5p
HL comment (24 March 2020)
BT has announced it's in talks to sell its domestic French operations to Computacenter. The division generated around £104m in revenue in the fiscal year ending March 2019, representing around 0.4% of overall sales.
Negotiations are ongoing and the deal is subject to consultations with works councils over a minimum period of two months, after which the deal will be subject to regulatory approval. Completion is expected by the end of 2020.
The shares were up 6.6% in early trading.
BT hasn't given the market an update on its trading since the coronavirus outbreak began to seriously disrupt life in Europe. On 13 March 2020 the group said CEO Phillip Jansen had tested positive for the virus, but that his case was mild and he would continue to lead the group while working remotely.
At this juncture, we don't think COVID-19 was going to be too disruptive for BT. People staying at home often rely on an internet connection for both work and recreation. While BT may find maintaining and upgrading its infrastructure much harder as workers are asked to stay home, we doubt the group will see a material fall in demand for its core services. Of course, the situation and our assessment may change in the coming weeks.
BT's largest segment, Consumer, sells mobile and broadband directly to nearly 30 million people through the BT, EE and PlusNet brands. Enterprise does something similar for businesses, and Global is (unsurprisingly) BT's international segment. Openreach (a legally separate but wholly owned company) looks after the copper wires and fibre cables that connect our homes and businesses.
Jansen has made expanding Openreach's reach his first priority as CEO. Openreach is an attractive, high-margin business, but the regulator will always want more for less. More high speed internet connections at lower prices is great for the consumer, but limits the returns available for investors.
Tough smartphone and broadband markets are hitting the Consumer division, and Enterprise and Global are having to adapt to rapidly-changing environments. Customers are also increasingly plumping for more up-to-date means of communication. All the while, the group's multi-billion pound pension deficit is soaking up funds.
The group's looking to cost reduction and marketing to help mitigate intense price pressure, but there's only so far these measures can take you. There's also no guarantee BT will be able to simultaneously bring its B2B units up to speed, effectively navigate the tricky world of mobile & broadband provision and strike good terms with the regulators.
We think the extensive to-do list, coupled with general coronavirus related falls in equity prices, explains why the shares currently trade on 5.0 times expected earnings, using the latest analyst earnings predictions, although of course in reality this could change.
It also helps explain a prospective dividend yield of 9.1%, although dividends aren't guaranteed and analysts are expecting a cut in the near future. In our view, it wouldn't be a total surprise if BT decided to preserve its cash - which could mean changes to the dividend come sooner rather than later. Investors should take nothing for granted amid such unprecedented disruption.
Overall, a turnaround could deliver significant gains, but it would be no small feat, and we'll need to see signs of progress before turning more positive.
Third Quarter Results (30/01/2020, figures on an underlying basis)
BT's third quarter results showed adjusted revenue down 3% on last year to £5.8bn, reflecting the impact of regulation, competition and the decline of old products.
Cash profits fell 4% to £2.0bn on increased spectrum fees, operating costs and investments.
Third quarter Consumer revenue declined 2% to £2.7bn, and cash profits fell 4% to £620m. BT primarily attributed the declines to regulatory headwinds, but also drew attention to increased investment and spectrum licence fees. In November, BT Sport secured the exclusive rights to show certain European club football leagues, including the UEFA Champions League, until 2024.
Enterprise revenue fell 6% to £1.5bn as customers used less of BT's fixed phone lines and some assets were sold. However, declines were partially offset by growth in mobile and other internet services. Lower revenue caused cash profits to fall 4% to £490m, but both revenue and cash profits would have declined just 2% if asset sales are excluded.
BT's Global business continued to move away from lower margin and legacy products, resulting in 10% lower revenue of £1.1bn, and 10% lower cash profits of £155m. BT has agreed to sell its Spanish operations, and the deal is subject to regulatory approval.
Openreach revenues grew 2% to £1.3bn thanks to a higher rents in fibre-enabled products and Ethernet. However, this growth was offset by both regulated and commercial price reductions and higher compensation payments. Cash profits fell 1% to £722m, due to higher business rates and salary costs.
Underlying net debt was £1.1bn higher than at the start of the year, at £18.2bn, reflecting payments to the pension scheme, capital expenditure and dividend payments.
BT estimates that the government's recent decision on the role of certain vendors in UK's 5G and gigabit-capable network will cost them around £500m.
CEO Philip Jansen described the results as "slightly below expectations", but confirmed that the group remains on track to meet full year guidance.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
Previous BT Group plc updates
The London Stock Exchange does not disclose whether a trade is a buy or a sell so this data is estimated based on the trade price received and the LSE-quoted mid-price at the point the trade is placed. It should only be considered an indication and not a recommendation.
Trades priced above the mid-price at the time the trade is placed are labelled as a buy; those priced below the mid-price are sells; and those priced close to the mid-price or declared late are labelled 'N/A'.