BT's Competitive Advantage Stregthens

The acquisition of EE has strengthened BT’s offering due to it being the only operator that owns both fixed-line and wireless telephone networks

Allan C. Nichols, CFA 11 July, 2018 | 8:39AM
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BT telecoms uk equity stock ftse 100 telco

BT’s (BT.A) competitive advantage is stable, according to analysts. The telecoms stock previously had a negative moat rating according to Morningstar’s equity analysts – meaning the source of its narrow competitive advantage was waning or unstable.

We think the acquisition of EE has strengthened BT’s moat due to it being the only operator that owns both fixed-line and wireless telephone networks. As the owner of both networks, it controls the upgrade schedule, so it knows what areas will first be built out with new services, whether that is fibre-to-the-home,, or 5G.

It can target first the most competitive locations. It also has full control of marketing, billing, and the ability to cross-sell other services. Other countries that are further along in convergence have seen dramatic declines in churn.

We anticipate BT will also reduce churn, which enhances the lifetime value of a customer and allows the operator to reduce marketing and retention spending. As the only operator in the country that owns both networks, we believe BT’s moat is strengthened.

Our negative trend was primarily due to problems at BT's global services division. However, the acquisition of EE and continued declines at the global services division have reduced its impact. This division’s revenue has declined from about 40% of external sales in fiscal 2009 to about 21% in fiscal 2018.

It hasn't earned a respectable return on invested capital for some time, and we don't expect it to during the next couple of years, either, but it has intentionally lost a lot of low margin revenue. We anticipate revenue and margins to become more stable and ROICs to slowly improve.

While BT has gained broadband share for the past several years, CityFibre has built out a fibre network in a few cities and has signed an agreement with Vodafone to pass 1 million homes with FTTH by 2021 with an option to go to five million homes by 2025. This new network could reverse BT’s broadband subscriber growth trend. However, we are sceptical that CityFibre can generate a fair return on capital with this business.

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About Author

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