BT Group - Reaching New Highs

BT Group Logo

With the FTSE 100 index reaching multi-year highs recently at over 6600 points, it is not a surprise to see the non-natural resources constituents rallying strongly. BT Group (LSE:BT.A) is one of these with the share price also reaching multi-year highs at 309.5p/share today having entered the year at only around 230p. BT is certainly one of the UK's most successful firms - growth has been translated into profits for investors since it was privatised in 1982. The company has 7.88 billion shares in issue, capitalising it at £24.4 billion. With the company recently unveiling its new BT Sport channels and robust 2012 results, investors will be hoping that the resilient performance of the group that has been experienced throughout 2012 can be mirrored throughout the remainder of 2013.

The technical position of the shares is currently strong with today's results underlining the positive tremd with larger than usual volumes backing up this. Whilst BT is far more susceptible to the wider macroeconomic environment and FTSE movements compared to some of the more illiquid smallcap companies, assuming the stable and strong FTSE trend continues, BT could either continue to break out or drop back within the previously established trend line. However, it is important to recognise that the rising trendline is now likely to provide rising support for the stock. Compared to the commodity companies on the FTSE, BT is relatively far more stable share price wise with drops tending to be short-term phenomena. The strong institutional backing that all the FTSE 100 shares enjoy means that BT is not particularly vulnerable to price swings with the shares today quickly marked up during the opening auction. Barring another financial collapse similar to late last decade, BT shares are likely to continue to have a ~15% trading range hence any investment would likely need to be medium or long term in terms of timescale. Due to BT's premium listing is is ISAble and it is also listed on the NYSE under the ticker BT.

British Telecom (BT) was founded in 1846 by William Cooke and John Ricardo and has since developed into a multinational telecoms company. It has operations in over 170 countries and in the UK, the group controls just under 30% of the market share for the 'Fixed Broadband Providers' industry according to Ofcom.

BT's main activities are the provision of fixed-line services, broadband, mobile and TV products and services as well as IT services around the world. The company is in the process of spending £2.5bn to roll out fibre broadband to approximately two-thirds of UK businesses and homes with the project due to be completed in Spring 2014. Fibre broadband is effectively broadband delivered through fibre optic cables - it can be done through two separate methods; Fibre to the Cabinet and Fibre to the Premises (FTTC and FTTP respectively). FTTC uses fibre-optic cables throughout the network right up to the street cabinet. It then uses copper wires to connect the cabinet to homes and businesses. FTTP means fibre-optic cables run right to the door of each house or business. FTTP has faster upload and download speeds compared to FTTC. Aside from this there are multiple more facets to BT's business that are not possible to appraise in a succinct manner.

BT has historically had strong results and the FY 2012 results did not disappoint. The key salient figures are listed below:
- Revenue declined 5% to £18.253 billion
- EBITDA rose 2% to £6.18 billion
Courtesy of BBM Explorer on flickr

- Reported pre-tax profits rose 2% to £2.5 billion with EPS matching this, up 3% to 26.7p
- Net Debt reduced by £1.285 billion to £7.797 billion
- Full year dividend rose 14% to 9.5p from 8.3p last year
- Excluding transit, operating costs fell 6%

CEO Ian Livingston commented: "We are driving fibre across the UK, launching high quality sports channels, investing in the high-growth regions of the world and will use our wi-fi capabilities and 4G spectrum to make sure our customers will be the best connected."

Aside from the historic figures, BT also forecast EBITDA between £6bn-£6.1bn for 2013/14 and £6.2bn-£6.3bn for 2014/15. The company's share buyback scheme is also going to continue with circa 600m shares expected to be bought back over the next two years. The full year dividends are also set to continue annual rises between 10-15% over the next two years. However, there was one concerning yet expected issue in the form of the pension deficit which had increased following the effects of Quantitative Easing on debt markets: "The IAS 19 net pension deficit at 31 March 2013 was £4.5bn net of tax (£5.9bn gross of tax), compared with £1.9bn (£2.4bn gross of tax) at 31 March 2012 and £4.3bn (£5.5bn gross of tax) at 31 December 2012." Despite this, the figure was not as bad as some analysts had feared which helped fuel the rise.

Furthermore, even with heavy investment into BT Sport, free-cash-flow is forecast to rise to £2.6bn by 2015 (fiscal year) which was over 7.5% ahead of consensus estimates according to Bank of America Merrill Lynch. They noted: "With the story reliant on cost cutting for the past few years, a return to growth (which is enabled by investment paid for by efficiency savings) could lead to a re-rating by the market in our view." To accompany this they upgraded their share price target from 275p to 325p/share. Aside from this, there have also been a number of other broker rating readjustments recently for BT. Espirito Santo issued a neutral rating on the stock shortly before the results citing a 250p target with Liberum Capital maintaining their buy rating with a 315p target. Morgan Stanley and BNP Paribas both reiterated their equal weight and neutral ratings respectively.

In reference to the results, BT's fibre roll out scheme continued strongly in Q4 2012 with their customer base more than doubling to in excess of 1.5m customers. In addition the group's outlook included a healthy order book over the wholesale and global divisions. The roll out is expected to continue not least due to BT's unveiling of BT Sport - the terms have been kept somewhat under wraps.

BT Sport Logo

BT Sport includes a series of sports channels that will feature a range of sports games including 38 Premier League games a season, all 69 Aviva Premiership Rugby matches, the FA Cup, SPL matches and MotoGP among a range of other competitions. Considering the significant number of sports matches that are to be offered in addition with a special offer of free HD for those who sign up before August, it would not be unreasonable to expect a shift of customers to the new services. Currently BSkyB is effectively a monopoly in the sector and the announcement of the BT service was met with a sell-off in BSkyB shares. Whether the introduction of BT to the market will lead to a price war between the two firms remains to be seen. The shares recorded their largest daily fall in over a year as shares slumped from circa 860p to around 807p. Talktalk shares also declined, down over 10% yesterday and extending losses today on the back of the news.

In terms of the product itself, there are three 'ways to watch' which will undoubtedly be appealing for customers; via a digital satellite platform such as Sky, on BT TV through BT Infinity or online/via an app. The latter of these is likely to be attractive to consumers with BT making the first step towards exploiting the ever-growing tablet and mobile computing markets. In addition, broadband customers will gain free access to the channels once they go live in August. New BT customers will have to pay £10/month for copper line broadband or £15/month for superfast fibre broadband and a £15.45 line rental charge. The set-top box for watching the games on TV costs £199 upfront although the online/app component is free, but if you have a Sky box, TV BT Sport is also free. The cost structure for BT Sport does depend on a variety of factors though which are not all stated above.

Hotels and betting shops that take up the offer could undercut Sky's prices by up to 75% in some cases. In terms of transferring from Sky to BT, figures provided by Sky do actually show that it is more expensive partially due to one off costs. Consequently, in the short-term the question may actually be whether BT can attract new customers not currently enrolled in Sky's service as opposed to transferring them across. Regardless, BT is a household name and so should benefit quickly in this venture due to its strong brand strength and potential for customer inertia. Customer drop-out rates could decline in tandem with the release of BT Sport and BT TV subscribers could gain a much needed boost to help reduce the current disparity between BT's sub 1 million TV subscribers compared to Sky's figure which is over ten times this.
courtesy of ell brown on flickr

On the outlook for BT, Ian Livingston said: “We are doing what we said we would do. In an environment where it is easier to focus only on the short-term, we are investing in our future and delivering growth in profits and dividends. We have created around 3,000 new jobs in the UK over the last year to support these investments. Our focus on improving efficiency across the business will allow us to continue to deliver strong financial results whilst making these investments. Our good performance this year is reflected in our dividend which is up 14% for the year. We have a lot more to do but we are now a lot better positioned to do it.”

BT has continued its solid performance in recent years and whilst its share price movement has been very positive, it also offers a good dividend for patient investors. Indeed the 9.5p full year dividend marginally beat the 9.4p that was estimated which reiterates the confident outlook on behalf of the company. The company is currently trading at around 11.6x 2012 earnings and forecast yields for 2014 and 2015 will likely exceed the 3.3% forward dividend yield averaged by FTSE 100 constituents. Even though side-issues could emerge (e.g. a recent Ofcom investigation has started into whether BT had undertaken anti-competitive practise through an alleged "margin squeeze in its superfast broadband pricing"), the overall outlook here looks as solid as ever for long-term value investors. Whether BT shares have reached a short-term top in tandem with the wider markets is still up for debate though. No Rating.


  1. I have been a long term shareholder in BT and prefer this company to the higher risk ones. Stonking results and have top sliced my holding today

  2. Great Article. BT is a merit to uk

  3. Very interesting to have a review on a large company as most are on medium tier or small tier companies. I do like BT and have monitored them for a very long time