Business Overview
BT Group (LON: BT.A) is a fixed-line telecommunication company, based out of London. The group’s business is built around the clients, delivering value and serving their needs persistently. For the investors, the company creates value by services and developing and selling products that are an important part of modern life. The group is segregated into four customer-facing lines of business: Enterprise, Openreach, Consumer, and Global. It is serving clients across 180 countries. British Telecommunications PLC encompasses virtually all assets and businesses of the BT Group and is a wholly-owned subsidiary of BT Group PLC. The company was incorporated in 1846, and is the world's hoariest communications group, tracking all the path back to the Electric Telegraph Company. BT was the first group to build a countrywide communications network. The company is part of the London Stock Exchange.

Key Statistics



Top Shareholders

 

Management Team

The group’s board has supreme responsibility for the management. The company’s board comprises of the Chairman, the Chief Executive, the Group Chief Financial Officer and non-executive directors. It is also endorsed by the Company Secretary. The current Chairman is Jan du Plessis, who joined BT Group in 2017. Philip Jansen holds the responsibilities of the Chief Executive. Simon Lowth holds the responsibilities of the Group Chief Financial Officer.
On 30^th January 2020, the company will announce the Q3 FY2020 results. The group will also release the Q4 FY2020 results on 7^th May 2020.

Segments

The company’s operations are divided into four reportable division, namely Enterprise, Openreach, Consumer, and Global. The consumer division has more than 620 stores on the high street and around 30 million customers. In the United Kingdom, the company is the largest provider of fixed broadband communications and mobile consumer services. In the Enterprise division, the group sell IT and communications services to approximately 1.2 million businesses and public sector companies in the Republic of Ireland and the United Kingdom. This division provides network services and products to over 1.4 thousand communication providers (CPs) operating in Great Britain. The global division is a prominent communications supplier. They also provide IT infrastructure services and managed the network, enabling clients' digital transformations. In Openreach division, the company has the United Kingdom’s digital network business and linking homes and businesses large and small. The group would like to build the best possible network in the Openreach division, through the highest quality service.

The Consumer segment capex increased by 22% to £455 million in H1 FY20.EE brand launched unlimited plans. The revenue for the first half of 2020 was down by 5% to £3,055 million in the enterprise segment,due to continued decline in the traditional fixed voice, lower managed service revenue and a reduction in the low margin equipment sales, partly offset by growth in mobile, VoIP1, WAN2 and Ethernet. In this division, the company launched a new converged product portfolio. EBITDA was up by 19% (H1 FY20) in the global segment. In the Openreach segment, the revenue was broadly flat at £2.5 billion in H1 FY20, driven by the commercial and regulatory price reductions and higher service level compensation. The decent move was taken by the Government’s £5 billion pledge to support the costliest premises in the rollout of gigabit-capable broadband. The company also announced new higher-tier FTTP products in Openreach division.

Market Share

In the retail fixed broadband market, BT Group holds the largest market share, followed by Sky, Virgin Media, TalkTalk and other providers. According to the United Kingdom (UK) 2018, the market share held by mobile operators, by subscriber are BT, including EE (28%), O2 (26%), Vodafone (21%), Three (12%), Tesco Mobile (6%), Virgin Mobile (4%), Sky (1%, Talk Talk (1%), and iD Mobile (1%).

Recent News (as on 15^th November 2019)

Until 2024, BT Sport will stay the elite home of all topflight European club football until the year 2024. For the next three seasons, the company has guaranteed the rights to all 420 games of the UEFA (Union of European Football Associations) Champions League, UEFA Europa League and the new UEFA Europa Conference League. This represents an increase of 77 games from the prior deal, and also comprises in-match clips and highlights, and begins in 2021.

Key Strategic Developments

For consumer and business segments, the company launched a host of new products, with the BT Mobile 5G and new Halo converged product plans. The group introduced an array of new service initiatives comprising bringing the BT brand to the high street in more than 600 EE/BT dual-branded stores, and to answer 100 per cent of client calls in the United Kingdom & Ireland from January 2020. On the BT modernisation agenda, the company continued to make growth, including delivering more than £1.1 billion transformation benefits, disposal of BT Fleet Solutions, and announcing the first locations in the Better Workplace Programme.

Financial Highlights (for the half-year to 30 September 2019, £million)


(Source: Interim Report, Company Website)

In the first half of the year 2020, the company’s reported revenue decreased by 1% to £11,467 millionas compared with the corresponding period of the last year, due to the effect of regulation, strategically reducing low margin business, and decline in the legacy products. Adjusted revenue was down by 2% to £11,413 million in H1 FY20. In H1 FY20, the profit before tax was almost the same from the corresponding period of the previous year, while adjusted EBITDA reduced by 3% to £3,923 million, driven by an increase in the content costs, spectrum fees, and investment to enhance competitive positioning. Basic earnings per share surged by 2% to 10.8 pence against the same period in 2018. Net cash inflow from operating activities stood at £2,173 million in H1 FY20; normalised free cash flow was down by 38% to £604 million, driven by the increased capital expenditure, higher interest and tax payments, partly offset by one-off cash flows. Capital expenditure was up by 3% to £1,882 million, due to increased network investment. The interim dividend per share was 4.62 pence and remained the same from the previous year same period data.
Key Performance Indicators (KPIs)

Customer Service



Right First Time is the key measure of customer service. It tracks how often the company keep the promises to customers. This could be keeping to appointment times, completing orders in the fixing faults or defined timeframe within an agreed period. Right First Time was up by 5.4% in FY19 as compared with the previous year data (FY18: up 4.3%).

Underlying Revenue



Underlying revenue signifies the underlying performance of the company that will contribute to long-term sustainable growth. The group exclude the impact of specific items, foreign exchange movements, acquisitions and disposals. The underlying revenue for the financial year 2019 decreased by 0.9% against the prior year, driven by the reductions in Openreach and declines in the enterprise businesses.

Adjusted Earnings Per Share



Adjusted earnings per share are the adjusted profit after tax attributable to shareholders, excluding the effect of specific items, divided by the weighted average number of issued shares. This also makes it a comparable and consistent way of measuring business performance over time. Adjusted earnings per share stood at 26.3 pence in FY19, a decrease of 6% from the previous year data.

Normalised Free Cash Flow



Normalised free cash flow is free cash flow, including net cash inflow from operating activities after capital expenditure, after net interest paid, before pension deficit payments, including the cash tax benefit of pension deficit payments, and specific items. The company generated a normalised free cash flow of £2,440 million in FY19. This was in line with the outlook of £2.3 - £2.5 billion range.

Financial Ratios

 

The profitability margins of the group were higher than the last year and almost the same from the industry median. The liquidity ratios have also increased gradually, which might indicate a normalisation of ratios. However, the company’s debt-equity ratio accelerated in the current period as compared to the previous period and was well above the industry average.

Share Price Performance


Daily Chart as at December-16-19, before the market close (Source: Thomson Reuters)

On December 16, 2019, at the time of writing (before the market close, at 10:53 AM GMT), BT Group shares were trading at GBX 205.60, up by 1.96 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 260.40/GBX 157.67. The average traded volume for 5 days was up by 27.67per cent as compared to 30 days average traded volume. The company’s stock beta was 0.81, reflecting lower volatility as equated to the benchmark index. The outstanding market capitalisation was around £19.93 billion, with a dividend yield of 7.64 per cent.

Valuation Methodology
Method 1: EV/EBITDA Approach (NTM)



To compare BT Group with its peers, EV/EBITDA multiple has been used. The peers are Orange Belgium SA (NTM EV/EBITDA was 4.5), Vodafone Group PLC (NTM EV/EBITDA was 6.30), Orange SA (NTM EV/EBITDA was 5), and Telefonica SA (NTM EV/EBITDA was 5.1). The average of EV/EBITDA (NTM) of the company’s peers was 5.22x (approx.).

Method 2: Price to Cash Flow Approach (NTM)



To compare BT Group with its peers, Price/Cash Flow multiple has been used. The peers are Orange Belgium SA (NTM Price/Cash Flow was 3.87), Vodafone Group PLC (NTM Price/Cash Flow was 3.75), Talktalk Telecom Group PLC (NTM Price/Cash Flow was 6.17), Proximus NV (NTM Price/Cash Flow was 5.19), Telenor ASA (NTM Price/Cash Flow was 5.88), Orange SA (NTM Price/Cash Flow was 3.57), Bouygues (NTM Price/Cash Flow was 4.93), Telefonica SA (NTM Price/Cash Flow was 2.61), and Telecom Italia SpA (NTM Price/Cash Flow was 2.32). The Median of Price/Cash Flow (NTM) of the company’s peers was 3.87x (approx.)

Growth and Risk Assessments

In Openreach segment, the company is the largest FTTP (Fibre to the Premises) network in the United Kingdom, including more than 2 million premises passed, 4 million by March 2021; ambition to pass 15 million by mid-2020s, subject to the right conditions; and ultimately want to cover most of the UK.FTTC (Fibre to the Cabinet) growth should be sustained to FY22 and FTTP growth to accelerate in the longer term. For the financial year 2021, the company’s transformational plans drive a long-term growth, due to the cost transformation programme was on track; continuing to develop plans to simplify the processes and systems; and the Better Workplace Programme is the largest of its kind in the United Kingdom (moving to modern, future-fit buildings, agreed sale of BT Centre for £210 million, and moving towards six key regional hubs with leases signed in London and Bristol). The environment is shifting in a way that will reward large scale investment in FTTP over the 2020s. In November 2019, the company said that they would expect to bring gigabit-capable broadband and full-fibre to every home and business across the United Kingdom by 2025.

For the full year 2020, the adjusted EBITDA, Cash capital expenditure, and normalised free cash flow will be in the range of £7.9-8.0 billion, £3.7-3.9 billion, and £1.9-2.1 billion, respectively.Over the last year, the company has de-risked the pension deficit, progressed ahead of target with the transformation plan, substantially launched 5G services and accelerated the FTTP build across the United Kingdom. While the group has indicated short term pressures on earnings, the company expect to maintain the dividend, and also stay committed to the dividend policy which is to grow or maintain the dividend each year, while reflecting a number of factors, including levels of business reinvestment and underlying medium-term earnings expectations. The company’s activities are exposed to a variety of financial risks: market risk (including interest rate risk and foreign exchange risk); credit risk; and liquidity risk.

Conclusion

From the company’s partnership with the UEFA, the BT Sport is going from strength to strength. Each year, the company will pay 400 million pounds for the rights and stays in a robust position to monetise this investment through wholesale access, subscriptions, commercial, and advertising revenues.

The group’s board is convinced that the company will make an extra value from more or faster investment in the near term with fair, predictable and competitive pricing; new customer propositions; a step-change in the customer service; accelerating migration from ADSL; accelerating 5G coverage, and accelerating FTTP build.By March 2021, the company will be investing in the building and supporting full-fibre for 4 million premises.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 201.65 (as on 13^th December 2019), with lower double-digit upside potential based on 5.22x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 3.87x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
 
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 16th December 2019).
*All forecasted figures and peer information have been taken from the Thomson Reuters.

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