BT: a Stock of Two Halves

Analysts are impressed with BT's efficiency measures and broadband projects, but sceptical as to whether the company will recoup the cost of its television venture BT Sport 

Allan C. Nichols, CFA 28 August, 2013 | 9:18AM
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While BT struggles to grow its revenue, the firm is doing a fantastic job of improving efficiency. The firm continues to reduce costs, enabling its margins to improve despite revenue declines, which we think is very impressive.

Additionally, the firm's revenue declines are diminishing with the retail division close to growing again and the Openreach division's external business actually growing year over year during its first fiscal quarter thanks to the higher take up of its fiber service. We think BT's fiber service will mostly offset revenue declines elsewhere in the retail division and provide growth in the Openreach division. Fiber is now available to 16 million premises in the U.K. with 1.7 million customers. The firm has also now won 29 regional bids in the Broadband Delivery UK, or BDUK, project and we expect BT will win all of the remaining ones. While this should provide some revenue growth, we project it will be at lower margins than the Openreach division's other revenue.

However, we are not as enthusiastic regarding BT's other new venture of taking on British Sky Broadcasting in television by launching its own sports channels. The firm has spent about £1 billion for content and launch costs.

Yet despite providing the service free to its broadband customers, only one million or about 16% of BT's broadband base have signed up. While the service may slow defections to BSkyB on the broadband side, we don't think many BSkyB television customers will switch to BT. We think BT will struggle to earn a decent return on the capital it has invested.

Elsewhere, BT's Global Services division's revenue declines have eased, but we project it is still several years away from returning to growth. The division is fighting both a weak global economy and the headwinds of corporations moving to lower cost Internet based services. Finally, BT continues to struggle with its pension deficit. Despite making a special £2 billion payment in 2012, the deficit remains in excess of £5 billion. We think the market forgets to adjust its valuation of BT for this deficit, which the firm has struggled to rid itself of consistently for over a decade.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BT Group PLC138.95 GBX-0.71Rating

About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.

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