BT Shares Still 'Too Expensive'

THE VALUE INVESTOR: Despite better than expected year-end results, and a wide reaching broadband network, BT is still trading at above its fair share price estimate

Allan C. Nichols, CFA 9 May, 2014 | 8:51AM
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BT Group (BT.A) reported fiscal year-end results that were slightly better than our expectations. This improvement, coupled with the United Kingdom lowering its corporate tax rate to 21% this fiscal year and 20% next year, will lead to a small increase in our fair value estimate, although we still consider the stock to be overvalued.

The firm’s revenue grew 1% year over year versus our flat assumption. The main driver of growth was broadband, which improved its customer base 8.6% to 7.3 million. Broadband benefited from BT Sport being shown for free on the service. The firm now has three million direct subscribers to BT Sport and an additional two million wholesale customers.

We are pleased to see the traction the service is gaining and think its scale is becoming large enough to justify the cash that has been spent on it. We are also encouraged with BT’s fibre service, which has now reached 2.1 million and runs passed 19 million households, which is more than Virgin Media’s network. We anticipate this service, along with the extension of free BT Sports for another year, will continue to drive its broadband business. In total, BT’s consumer business’ revenue grew 4% for the year.

However, the rest of BT’s businesses showed flat to lower revenue. In the largest, global services, revenue declined 2%. That said, its order intake in the fourth quarter was £2.2 billion – 13% higher than the year-ago period. We are also happy to see the turnaround in this division continue. Importantly, its EBITDA is doing even better, with solid growth of 12% for the year. This gain and cost cutting in other divisions led to an adjusted EBITDA margin of 33.4% versus our projection of 33.2% despite the increased costs of programming for BT Sports.

While we continue to anticipate additional cost cutting, we think significant margin expansion will be held back by higher programming costs. Despite an expected increase to our fair value estimate, we think the shares are overvalued.

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About Author

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