More on BT
BT
BT’s market share has reduced over the years but its still dominates UK telecoms. It also is highly cash generative and is moving uscessfully into newer services such as broadband, although we see some signs of a return to its previous over ambition.
Although its share of business voice minutes has fallen to 40%, it still dominates the residential market. Even where customers buy retail from other suppliers, those suppliers have themselves bough wholesale from BT. BT’s ADSL broadband internet connections are a good example: only 30% of ADSL lines are supplied by BT Retail directly to customers, the rest are supplied by internet service providers who buy the lines wholesale from BT, of course this does mean that BT’s share of the profit on the final sale of each line is less than it would be if BT directly supplied retail customers.
The next stage in opening up residential telecoms to competition is reducing BT’s value added on each sale further. This is local loop unbundling which allows other operators to install equipment at BT’s exchanges for a fixed fee and carry use their own network from their on - in these circumstances BT’s part of the connection is only the “last mile” between the exchange and the customer’s premises.
All the above means that BT’s market share will continue to fall as telecoms moves from the traditional voice services to networks that handle both data and voice together (already often true in the case of the internal functioning of the networks). This will be worsened by substitution of mobile connections for fixed. It will be worsened still further when the next generation of data connections (optical fibre to customers premises) becomes cheap enough for consumer use (as it already is in parts of the USA).
BT’s reaction, which we believe is the right strategy, is to aggressively roll out its own new networks. BT is currently expanding its wi-fi coverage. More ambitiously BT plans to upgrade its network to “broadband dialtone”, which would mean that broadband connections will supplied as standard with telephone lines, so all customers would have to do to have broadband connections would be to plug equipment in. This will take five years to reach most customers which may prove to be a little slow as BT is likely to have lost significant marketshare as a rsult of local loop unbundling by then
BT is being surprisng successful in replacing the declining revenues from its traditional business (fixed line viouce) with new “wave revenues” (broadband, IT, mobile, services, directories). Its third quarter (three months to December 2004) revenues were up slightly year-on-year at £4.6bn despite the 8% decline in its ttraditional business. The latter was partly due to the c3% impact of the reduction in mobile call termination rates. New wave revenues were up 35% and now make up a quarter of the total. Profitability was also just about maintained with EBITDA down 3% and diluted EPS up to 4.7p from 4.4p.
What is more worrying is BT’s acquisition of Infonext during the last quarter, not only was it expensive, but it is also a return to a more ambitious strategy of becoming a truly global telco, something which BT has tried and failed to do twice before. We would prefer BT to be content to generate cash from its traditional operations, restrict investment to its UK network upgrades and payout more cash to shareholders.
BT generates a lot of cash. Its free cash flow (after all capex on its old and new networks, before dividends, acquisitions and disposals) was £1.1bn in the first nine months of the year, equivalent to free cash flow per share of 18p a year. This is 8.6% of the current share price of 206p, which demonstrates just how much money BT could potentially pay shareholders.
BT currently has a 5% dividend yield (expected to rise to close 6% next year) and trades at a prospective PE of 11×.
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