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BT full year results
Strong growth in “new wave” revenues continued to replace lost revenues from BT’s declining traditional business; underlying revenues (organic and adjusted for the regulatory cut in mobile call termination rates) were up 1%. The adjustment for the change in mobile termination rates is useful as this affects what are in effect “pass through” revenues which do not directly affect BT’s profits. New wave revenues were up 32%, although growth in the fourth quarter was a little weaker (27%) than in the first nine months.
BT continues to lose market share and is now down to approximately 41% of the business market and 62% of the residential market and continues to slowly lose share in both. This together with pricing is driving the loss of revenues from traditional voice telecoms.
We are reasonably happy that BT’s current strategy is going in the right direction, provided that acquisitions remain reasonably sized. It is investing in broadband and wi-fi, and most importantly a significant network overhaul that will make broadband part of a standard telephone connection rather than an add-on as well as provide the infrastructure for handling the expected growth in data traffic. So far the signs are that the switch is being successful and the new revenue streams are replacing the old.
BT is cash generative in spite of high capex requirements. It may appear that the new network will require considerable capital expenditure however BT has previously stated that capex will not be more than £3bn a year (the current level) - although this may seem surprising it is partly explained by the reduction in capex elsewhere on networks that will be retired rather than upgraded. In addition the new network will be cheaper to run and is expected to save BT approximately £1bn a year by 2008.
At a prospective PE of just over 10× and a similar price/free cash flow, BT is not expensive, but it does not offer much growth - it does have growth businesses but the effect of these is offset by the declining traditional business. The 5.5% (prospective) yield is attractive given that BT is a stable business and it is sufficiently covered.
The free cash flow per share of around 20p is close to 10% of the share price. Although BT is extremely unlikely to pay this entire amount as dividends, it could in theory do so. Whether retained, paid out, used to pay down debt (more than half is), or used for share buy-backs, this is nonetheless money that BT is making for shareholders.
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