BT Group plc – british Telco at a discount?

What makes more sense than writing about a business under investigations after writing a post about management qualities? Maybe the market has overreacted here?

British Telco BT Group had a … lets say issue with accounting in Italy.

The good progress we’re making across most of the business has unfortunately been overshadowed by the results of our investigation into our Italian operations and our outlook. We’ve undertaken extensive investigations into our Italian business, including an independent review by KPMG, and I am deeply disappointed with the unacceptable practices by some that we’ve found.

The stock price have dropped from 380 GB pence to around 300 GB pence, destroying around GBP 7 bn in shareholder value.

“The good progress we’re making across most of the business has unfortunately been overshadowed by the results of our investigation into our Italian operations and our outlook. We’ve undertaken extensive investigations into our Italian business, including an independent review by KPMG, and I am deeply disappointed with the unacceptable practices by some that we’ve found. This has no place at BT, and it undermines the good work we’re doing elsewhere in the Group. We are committed to ensuring the highest standards across the whole of BT. ” –Gavin Patterson

 

(Results for the third quarter to 31 December 2016)

Pensions

The IAS 19 net pension position at 31 December 2016 was a deficit of £9.2bn net of tax (£11.1bn gross of tax), compared with £9.5bn net of tax (£11.5bn gross of tax) at 30 September 2016. The 2017/18 pensions operating charge will be calculated at 31 March 2017, with changes in market conditions since 31 March 2016 expected to increase the operating charge by tens of millions of pounds year on year.

Net debt and liquidity

Net debt was £8,981m at 31 December 2016, a reduction of £586m since 30 September 2016 and £857m lower than at 31 March 2016. In the quarter, reported free cash flow was £585m

Outlook: 2016/17 underlying revenue1 broadly flat, EBITDA2 of c.£7.6bn, normalised free cash flow3 of c.£2.5bn. 2017/18 underlying revenue1 broadly flat, EBITDA2 broadly flat, normalised free cash flow3 of £3.0bn – £3.2bn

note to myself: I have to look at how they adjusted the EE numbers

 

Valuation BT Group:

BT Group plc profile on hl.co.uk

Market capitalisation: £30 bn
pension deficit £9bn
Net debt £9 bn
EV = £48bn
EBITDA £7.6bn
EV / EBITDA = 6.3

Peer Group valuations (EV/EBITDA) from Yahoo

(no adjustments for pensions ect from me)

Vodafone 9,28 (link)
AT&T* 7,42 (link)
Verizon 7,17 (link)

Telefónica, S.A. 8,20 (link)
Telecom Italia 5,85** (link)
Dt. Telekom 6,66 (link)

Average 7,43

Peer Group last Dividends from Yahoo

Vodafone 6,16%*** (link VOD)
AT&T* 4,60% (link)
Verizon 4,63% (link)

Telefónica, S.A. 8,17%*** (link)
Telecom Italia 0% (link)
Dt. Telekom 3,34% (link)

*** ?

Bottom line

I think there is potential for a Rebound in BT Groups share. Of course there could be more write-offs in the future – but I think the risk is already priced in. The marked knocked off 7bn for a (now) 0,5bn case. The stock is not super-cheap and of course there are macro issues with british stocks (Brexit). The debt level is manageable. And the   If you have a different opinion on BT Group please write in the comments.
disclosure: I have bought a small position.

Disclaimer

The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!

Additional information/Material:

 

Today on  Jan 24, 2017 07:00 GMT this news from british BT Group came out:

Update on investigation into BT’s Italian business and on BT Group outlook

The investigation into the financial position of our Italian business is now substantially complete.

The EBITDA contribution of the Italian business included in the Group’s reported EBITDA for the financial year ended 31 March 2016 was around 1%.

For Q3, with the exception of the financial impact of the BT Italy investigation, we expect to report results broadly in line with market expectations. Our consumer-facing businesses are set to report good revenue growth, with Consumer delivering continued volume and ARPU1 growth and EE achieving revenue growth for the first time.

Normalised free cash flow is now expected to be around £2.5bn.

BT Italy case was mentioned in Okt 2016 http://www.btplc.com/News/#/pressreleases/results-for-the-second-quarter-to-30-september-2016-1624371

 

Annual report 2016 (March) http://www.btplc.com/Sharesandperformance/Annualreportandreview/pdf/2016-Annual-Report.pdf

Page 95 = numbers

Note: continental Europe is 32% of revenue, 42% is UK

 

BT Group (dividends)

Advertisements

8 thoughts on “BT Group plc – british Telco at a discount?

    • Hi Tony,

      I haven’t came up with a standalone valuation for all sectors. Openreach would be the biggest and most valuable of them.

      If they have to disvest Openreach on Ofam instructions, they would get a fair compensation for it & they have a lot of internal revenue in BT Group that would at leas partly stay at BT Group.

      Like

      • The debt numbers are wrong. There is a converted bond, thats counted double and they will also sell some real estate assets.
        The debt/ebitda ratio should be already below 3. The EBITDA is also growing so the ratio should decrease.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s