Buy BT at a long-term bottom?

Q2 EBITDA was up by 3% yoy. BT is well on track to meet its £3bn savings target by FY25 and we await the next phase (plan to shed 40% of staff by the end of the decade). BT is a long-term buy and hold. However two elements are likely to prevent a sharp increase in the short term: a dividend yield at 6.95% and short-term selling pressure with the possible exit from the share capital of Drahi or DT.

BT stock: a case to follow very closely

There may be short-term selling pressure on the stock with the possible exit of the capital of Drahi or DT. Infrastructure funds are, however, certainly following BT closely. Several large private equity firms could launch a joint offer for the whole company if they can first find a price to buy Drahi’s and DT’s stakes.

A fairly safe long term buy and hold

A decent Q1 performance despite the expected headwinds from cost-of-living pressure and cost inflation. The group is clearly a fairly safe long-term buy and hold. BT plans to shed more than 40% of staff by the end of the decade. In parallel it is further accelerating its FTTP deployment with high capex. But at the end of this phase EBITDA-capex could be multiplied by 2.5. Speculation could also again reignite as Drahi’s empire (owning 24.5% of BT) is being shaken by corruption cases.

Thunderclap in British telecoms

FY23 revenues and EBITDA were in line with expectations. The major news was that BT plans to shed more than 40% of staff. At the end of the decade the EBITDA could reach £11bn with the massive restructuring announced and capex could return to €3.5bn per year. EBITDA less capex could be multiplied by 2.5 and therefore also the dividend. This could value BT at 385 pence at that time. We maintain our opinion at Add on the stock.

Pay attention to BT's future contributions to its pension assets

BT’s Q2 operational performance was pretty decent and similar to that of the Q1 with revenues up by 1% yoy and EBITDA up by 3% yoy. But pay attention to BT’s pension assets. The group has decided to input a 5.35% discount rate to somehow hide its massive pension fund deficit and to shift in time the contributions it will have to make to balance its pension accounts when inflation returns to a more normal lower level.

Modest revenue growth for the first time in a long time

In Q1, the group returned to growth in terms of revenue for the first time in a long time. However, this is the objective that the management had set for 2022/23 three months ago. Cost control remains ongoing but capex continues to grow. We are now at Add (with a limited 13% upside) on the stock which has declined by 11% in the last two weeks with the rotation toward quality growth stocks at the expense of telcos.

Hoping that revenue will finally grow in 2022/23

No surprise for the Q4 as revenues still did not stabilise while the EBITDA was up by 3% thanks to BT’s transformation programmes and tight cost management. Capex was however up by a whopping 25% in 2021/22 and will remain at its peak in 2022/23. So, the group is not yet out of the woods and we see no dividend increases in the coming years… We remain at Reduce (however, with now some modest upside).

BT deploys fibre in the UK but sales recovery is not here

Stock up by 5% following the Q2 release. The market welcomes indeed the return of dividends and the effective deployment of BT’s ultrafast fibre network. Moreover, the group has hit its £1bn cost savings target 18 months early and now brings forward its 2024/25 target for £2bn of savings to 2023/24 with further savings in 2024/25. Here is the rub: the sales recovery is still not there. We maintain therefore our opinion at Add on the stock.

Revenues do not stabilise despite a favourable basis of comparison

Disappointing Q1 in terms of revenue, however offset in part by a solid EBITDA. Be cautious however that BT, like Orange, does not despair investors by postponing the stabilization of its revenues quarter after quarter. We maintain our opinion at reduce on the stock, however now with… a slight upside.

Where it is a matter of accelerating BT's fibre deployment

Patrick Drahi announced yesterday the acquisition through Altice of a c.12% stake in BT. We believe that BT’s stock after its 6% increase yesterday is now at its price. We also don’t believe that Drahi will increase his stake in the short term… he will have more influence on the strategy as an activist fund. He will be the gadfly to push BT to divest Sports rights and to accelerate its fibre deployment (by bringing in Infrastructure funds).

Q4 will still be tough pending a revenue stabilisation in 2021-22

As expected, Q3 revenues and EBITDA were down by 5%, a less pronounced fall than in H1 but lockdown restrictions in Q4 are expected to impact the trading performance further with almost the entire retail estate closed in addition to all pubs and clubs. BT’s stock probably reached its nadir in November. It has recovered by c.35% since November but is still down by 20% yoy. BT must now stabilise its revenues, which won’t be possible for 2020/21 given the context.

A lower EBITDA decline than in Q1 and the outlook slightly raised

Q2 EBITDA was slightly better than expected, down by only 3% yoy despite an expected 7% revenue decline. As a result the EBITDA outlook for 2020/21 has been slightly raised. We have a Buy on the stock which offers significant upside potential to our target price as it has not recovered since mid-March and is still down by 50% ytd. Now that the dividend has been cut, we continue to believe that BT merits a much higher share price.

Doing a bottom can take time

Both Q1 revenues and EBITDA were down by 7% yoy with a COVID-19 impact a little bit more significant than the average for telcos. The group is currently investing heavily in its networks and one day this will pay off, although for the moment we are still waiting for a…revenue stabilisation and COVID-19 won’t help matters in 2020/21. We maintain, however, our Buy opinion: now the dividend has been cut, BT does not deserve such a low price.

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