More on BT
BT Q1 results
BT continues to replace declining revenues from traditional voice telecommunications with “new wave” revenues. Stripping out the effects of both acquisitions and the reduction in mobile call termination rates underlying turnover grew 3%. The revenues from mobile call termination were flow through revenues which BT charged customers and passed on to mobile companies at low or zero margin.
Growth in new wave revenues was strong both overall (up 48%) and within each of the major businesses. However the switch to new wave is not doing much for margins with EBITDA before one-off and redundancy costs falling 2%.
Retail, where BT is most exposed to competition, was naturally the weakest performer. Revenues fell 4% and margins shrank with EBITDA down 5%. Wholesale did better with falling revenues from internal (mostly to BT Retail) sales offset by growth in external sales (+18% underlying). Margins actually improved, even after adjusting for lower redundancy costs, largely as a result of cost reductions and operational gearing.
The Global Services business’s growth was largely driven by acquisitions but organic growth of 6% is reasonable. Changes in margins are difficult to discern given BT’s two major recent acquisitions are both within this business.
BT remains the dominant telecoms company in the UK thanks to its high residential market share and its near monopoly on residential telecoms at the (highly regulated) wholesale level. It is weaker in the business market, carrying less than 40% of all business traffic (in terms of voice minutes). We like the current strategy and BT has been successful so far in replacing traditional revenues with new wave.
Free cash flow in the first quarter was negative as a result of working capital movements and tax. These should reverse in the course of the year and we expect BT to remain very cash generative and the price/free cash flow should remain reasonable in line with the historical 11× (at the current price of 226p).
The prospective PE of around 12× is cheap, reflecting the gradual loss of market share (and therefore declining profits) expected from BT. The 5% yield is well covered (and BT is a stable business) providing support to the current price.
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