Bt Share Discussion Threads

[tbow112] 25/9/2023 11:08

I do not know why anybody thinks that operationally this company is doing fine when they appear to be making a complete mess of the copper to fibre transition.
In our case their current proposal for this year is apparently to pay us £600 for not having a telephone. If anyone thinks that is an efficient way of operating they need their head examined.
The one comment I would make is that their customer facing telephone system appears to work well by modern standards so there must be somebody within the company who is a competent manager,but it is certainly not the man in charge of the transition - which could prove very expensive.

[rathkum] 23/9/2023 15:36

BT Group: Shares Back In The Doldrums But Remain Cheap
Sep. 23, 2023 3:28 AM ETBT Group plc (BTGOF)
Mark Dockray
Summary

BT shares have turned sharply lower since around April. No stranger to disappointment, in this case there is little to grumble about operationally.

Concerns around the pension deficit may be a factor, given its size and exposure to assets like equities and property.

These shares once again trade at a deep discount to my estimate of fair value, albeit with a fair amount of uncertainty embedded in them.

BT Group (OTCPK:BTGOF) is nothing if not frustrating. Shares of the British telco have technically done just fine since my previous update in Q4 2022, returning around 13.5% in local currency and 11.5% for the ADRs, but performance to date still rankles a little given the stock was up over 40% as recently as April.

Chart
Data by YCharts

This company doesn't exactly have good form when it comes to not disappointing the market, but in this case I do think concerns are unrelated to what is happening at the business level. Indeed, I'd say that operationally the company is doing just fine. Growth is never going to blow the doors off of course, but a combination of low-single-digit revenue growth and operating leverage means that profits are up nicely at the moment. CapEx also appears to be by-and-large in line with expectations - one of my previous concerns given recent high inflation and the current large investment program.

My guess is that the pension scheme is what is weighing on the share price. That top-up payments to plug the deficit are a drag on free cash flow isn't anything new, but with the size of BT's pension scheme vast compared to its current market-cap I do wonder whether there is concern that the company might be on the hook for higher payments down the line.
All Looks Okay Operationally

BT's customer facing units are pulling in different directions. Like most of its peers, the segment that houses business customers (~20% of group EBITDA) is grappling with declines in legacy products like fixed voice. On the flip side, Consumer (~32% of EBITDA) is showing modest growth as broadband and cell phone contract renewals are linked to inflation. Openreach (~48% of EBITDA), which manages the UK's largest fixed-line network, is also putting in nice growth, likewise benefitting from inflation-linked pricing as well as the ongoing rollout of fiber-to-the-premises ("FTTP") broadband (which attracts higher revenue per user).

Most recent financial results are a little out of date now given we are near the end of the company's fiscal Q2, but Q1 was solid enough and was not the driver of its share price decline. Inflation-linked pricing mentioned above means that revenue and earnings growth are currently a little ahead of my long-term yardstick, with group FY23/24 Q1 sales up around 4% YoY and EBITDA up a shade more at 5%. Expected declines in Business (-11% YoY EBITDA) were more than offset by higher-margin Openreach (+12% YoY EBITDA) as well as Consumer (+6% YoY EBITDA). The full-year outlook - which sees growth in both revenue and EBITDA - was affirmed.
Little Change On Cashflow Forecast

One thing that had posed a slight concern to me was the impact of inflation on CapEx. BT's ongoing rollout of FTTP and 5G has seen CapEx rise to around 25% of revenue versus around 12% in the mid-2010s, and with higher inflation comes the risk that CapEx budgets end up heading unexpectedly higher still. That would mean even more of a squeeze on the company's already meagre free cash flow.

BT Group plc: CapEx To Revenue (FY15/16 - FY22/23)

BT Group CapEx To Revenue (FY16 - FY23)

Data Source: BT Group plc Annual Reports

Last year's CapEx spending landed broadly in line with prior guidance at circa £5B, and I reiterate that all the FY24 outlook metrics have been reconfirmed. That includes reported CapEx of £5B to £5.1B, with that seen steady out to the FY26 investment program peak.

BT Group plc FY30/31 Free Cash Flow Targer

Source: BT Group plc FY22/23 Annual Results Presentation

BT's longer-term free cash flow forecast remains unchanged, with base FCF (i.e. ignoring any contribution from growth) set to double from FY22 levels to around £3B by the end of the decade. Most of that (~66%) is from normalizing CapEx; the rest will follow from the associated lower costs (e.g. less maintenance) required to run a FTTP network versus the legacy copper one. This is all low hanging fruit for the company and I don't really see any risks in achieving this.
Pension Scheme Concerns To Blame?

Normalized free cash flow was £1.3B last year and is expected to be £1B this year at the low end. Taken at face value that all looks fine and dandy - enough to cover the dividend outlay (~£750m) with some change to spare.

The elephant in the room is the pension deficit. The situation is well-known to followers of the company and indeed it has been mentioned in most of my prior articles on the stock, but for the benefit of new readers, the short version is that BT has to support a huge pension scheme relative to the size of its actual business.

Top-up payments to address its pension deficit are substantial, coming in at a circa £1B cash outflow item last year and only expected to moderate to around £600m per annum from 2024 out to 2030. Subtracting this from the above free cash flow numbers leave us with relatively little actual near-term surplus cash.

BT Pension Scheme Asset Breakdown

Source: BT Pension Scheme Fact Sheet

Now, most of the scheme's assets are obviously in investment grade credit including government bonds. However, a not insignificant amount is in equities, property and other growth assets. My guess is that the market is worried that BT might end up on the hook for higher payments into the scheme should those asset values fall. Property, for example, is experiencing a fair bit of a pain right now due to the higher interest rate environment.
Shares Still Look Cheap

BT shares trade for 120 pence apiece at time of writing. As it stands, my DCF-derived fair value estimate from last time remains largely unchanged. That is based on consensus estimates for FY24-FY26 normalized free cash flow, plus management's longer-term forecasts (as show in the "Little Change On Cashflow Forecast" segment above), all discounted to the present at an annual rate of 9%. Subtracting net debt gets me to around £21B in equity value, or 210 pence per share (~$2.55 per ADR at the current GBP/USD exchange rate).

The wildcard is the pension scheme. Suffice to say that increased payments to plug the deficit would materially lower medium-term free cash flow and alter any DCF model substantially. Even so, an implied 80% discount to fair value already incorporates lower free cash flow to a large extent, and so I do think this is a risk worth taking. Strong Buy.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by
Mark Dockray profile picture
Mark Dockray
1.04K Followers
I like to take a long term, buy-and-hold approach to investing, with a bias toward stocks that can sustainably post high quality earnings. Mostly found in the dividend and income section. Blog about various US/Canadian stocks at 'The Compound Investor', and predominantly UK names on 'The UK Income Investor'.
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[dipa11] 20/9/2023 15:26

Copy from LSE Board "RE: NotesToday 10:56"Saudi Telecom buying 10% of Telefonica in 2023 is of much greater relevance than anything that happened 5 years ago"The point of the chart was to demonstrate the decline of Telecom stocks in general, Orange's share price has also seen declines. The only Telecom stock that's outperformed the rest is Deutsch Telekom, because of their US T-Mobile investment, which the market appears to like.Saudi Telecom purchasing a stake in Telefonica is what it is, like Drahi buying over 24% of BT, or E& looking at increasing its stake in Vodafone to 20%; All these purchases prove is that Telecom stocks are cheap, and possibly some strategic partnership reasoning behind Middle East interest. The Spanish Government might not be as nationalistic as the French, but they're not far off and they'll heavily scrutinise any further significant purchases of Telefonica stock."

[cafc69] 20/9/2023 10:34

Going well today

[smurfy2001] 18/9/2023 16:57

Worm appears to be turning.

[netcurtains] 15/9/2023 11:36

VOD still going up nicely.
Hopefully BT will follow in the afternoon.

[isis] 14/9/2023 22:41

Good News - at least they'll be no strikes! :))

[smurfy2001] 14/9/2023 22:22

Resounding ‘YES’ to BT Group pay deal
BT September 13 2023
Members across BT, Openreach and EE have voted by three-to-one to accept a CWU-brokered pay deal which delivers an additional 2.5% increase this year – on top of the £1,500 flat rate increase that was paid out in January – and a further across-the-board 4% increase that will apply from April 1 next year.

[trappy2] 14/9/2023 22:15

CWU has announced that they have agreed with BT all pay increases for 2024 - So Now Strikes!

[careful] 14/9/2023 12:03

ftse100 at the 7600 level it was at jan 1 2020....just before Covid/Boris Johnson afflicted us all.

looking steadier.

[action] 14/9/2023 10:26

90% buy so far . Tomorrow tripple witching day.

[netcurtains] 14/9/2023 10:16

Vodafone is flying. Hopefully BT will catch up.
touchwood.

[guss] 14/9/2023 09:38

Probably communications…; you don’t really want to cut that off.

[dipso] 14/9/2023 09:27

Does anyone know what dealings BT has with the Russians?
It is listed online among companies who are still “Business as usual” with Russia.

[netcurtains] 14/9/2023 08:24

Strangely VOD still rising this morning but BT seems to have stalled.
Probably a blip of some sort..

Touchwood.

[stansmith1] 13/9/2023 18:23

above your line in the sand target too :)i sold 1/3 at 131, if im going to buy them back i may not have long...

[smurfy2001] 13/9/2023 16:48

Got my dividend. Easy decision to re-invest given the yield.

[maxplus2] 13/9/2023 10:47

Have dividend been paid out ?

[netcurtains] 13/9/2023 08:53

Its nice its going up for a change.

[diku] 13/9/2023 08:15

Worms and snails coming out...

[cashflo] 12/9/2023 22:07

Whats happening here?

[isis] 12/9/2023 18:01

The Rain brings the Worms out.

[smurfy2001] 12/9/2023 17:45

Is the worm finally turning?