More on BT
BT H1 results
BT’s growth in the second quarter was slightly weaker than in the first. Organic revenue growth was 2.5% for the quarter, after adjusting for the impact of reductions in mobile termination rates, compared to 3% in Q1. The adjustment is justified as the effect of the rate reduction was to reduce revenues on what were effectively “flow through” (zero margin) revenues.
New wave (what BT calls anything other than PSTN voice telecoms) revenues rose 39%, but this was partly due to the effect of acquisitions. Organic growth in new wave revenues was 25%, lower than Q1 (31%).
We are not worried by the slight slowdown as the rate of growth in new age revenues remains strong - and more than enough to offset the declines in switched telecoms. We are getting a little concerned by the continued gradual decline in EBITDA. The fall was 2% before redundancy costs and other one offs in both quarters. Free cash flow has also worsened on last year - falling from £594m to £503m. However it has improved on the previous quarter.
The roll-out of local loop unbundling is gathering momentum and this is clearly going to put pressure on BT Retail’s pricing. However BT is in a strong position to provide a wide range of services - broadband in particular - and the current pattern of growth in new wave revenues offsetting declines is traditional voice services is likely to continue. The recent agreement with Ofcom takes some of the pressure of BT by concentrating regulation on some businesses, leaving the rest of BT more free to act as it wishes.
The timing of taxes and the decline in EBITDA, together gearing (partly a result of continued high capex) makes BT’s cash flow look less attractive. The price of 209p is nearly 24× (annualised) free cash flow per share. This is reasonable given the high capex. Although capex in telecoms looks likely to remain permanantly high BT should be able to do better than this in the long term. The 5% yield and 11× prospective PE remain attractive.
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