Renewed takeover speculation has boosted the shareprice of telecoms giant BT this week (30 November)
In the wings the City is waiting until 10 December to see what, if any, move major shareholder, Patrick Drahi, may make after the agreement that halted any potential bid expires. More central to the recent spike was speculation in the Indian press that Asia’s richest man Mukesh Ambani through his company Reliance Industries may make a bid for BT. Shares rose 6.5% on the report which was quickly denied as "speculative and baseless".
Away from the speculation BT continues its battle to fight the flab. In its latest half-year report on 4 November it announced it had hit the target to trim £1bn in costs 18 months earlier than planned. Now it is bringing forward its target for a further £2bn in cost savings a year earlier to 2024. The saving allowed it to announce a dividend of 2.31p per share.
Revenues were down 3% on the same period last year at £10.3bn, and pre-tax profits were down 5% to £1.01bn.
Revenues from the Global segment, which offers network and IT-related solutions to large businesses, dragged on the group’s top-line performance, declining 14% compared with the same period in 2020 to £1.7bn. Conversely, the Openreach division was up 5% to £2.71bn. The bulk of the revenue comes through the Consumer division which was largely unchanged at £4.86bn.
The BT share price had dropped since it topped £2 in June. That drop had started to reverse on anticipation of the half year figures and this latest boost means the shares have gained over 40% in the last 12 months.
BT is currently in the midst of a £15bn upgrade to the network with Openreach at its heart. CEO, Philip Jansen, said: "Openreach has now rolled out full fibre broadband to almost 6m premises and continues to lower its build cost. Its three largest customers are signed up to the new pricing offer as we see rapid adoption of what will be the UK's first nationwide full fibre network spanning 25m premises by 2026."
What could be expected from this media and telecoms conglomerate in the future? Let’s take a look at the stock’s price action, latest developments and fundamentals of the company to outline a plausible BT stock forecast.
BT share price news
In June 2021, billionaire investor Patrick Drahi, the founder and owner of Altice NV, bought a 12.1% stake in BT Group. As a result of this transaction, Drahi – who acquired Sotheby’s auction house in 2019 – has become the largest individual shareholder in BT Group.
These latest results are the last to be published before a six month agreement with Drahi expires and the company and the City will keenly await his next move. Reputed to be a tough cost-cutter the plans to bring forward the cost cutting programme and the CEO's belief that "we've got a tight grip on costs" will, no doubt, pique his interest.
In June BT's first quarter figures showed a 3% decline in revenues and a significant deterioration in its bottom-line result. After-tax profits went down by more than 99% compared with the same period in 2020, amid some elevated one-time tax charges. However, the group’s adjusted EBITDA and normalised free cash flow stood nearly unchanged compared with the same period a year ago at £1.87bn and minus £43m respectively.
BT share price analysis: technical view
The price action for BT Group stock has been quite bearish since the June peak as the price has progressively declined upon breaking multiple horizontal supports.
During the 4 November session the price action was quite bullish as bulls responded well to the financial news and pushed the price above 152p. Both the relative strength index (RSI) and the moving average convergence divergence (MACD) remain bullish with the former being over 70 suggesting it may be over bought.
In the following week the share price continued its run and by 9 November had risen to £163.21.
These opinions and comments have been made after performing a BT share price analysis. However, they should not be taken as a recommendation to buy or sell the stock.
BT Group fundamental analysis
In June this year, BT Group shared the historical performance of its Openreach unit, which was particularly interesting amid discussions about its possible spin-off from its parent company.
However, in an exclusive interview to Reuters, an anonymous source said investor Patrick Drahi is not going to sell his stake in network arm Openreach and backs BT spending billions to build the fibre and 5G networks. Drahi and BT have not given any official comments yet and are unlikely to until the agreement for Drahi not to take any action expires in December.
Openreach’s numbers are not particularly appealing as revenues brought by the unit have advanced at a very slow pace in the past couple of years, while its normalised cash flows have been progressively declining.
The company’s target is to connect 25 million UK premises with full-fibre broadband to the premises (FTTP) by December 2026. Thus far, the company has only reached 24% of that total with 6 million premises enjoying coverage at the moment, according to BT’s latest trading update.
The project, which was officially launched in 2006, involves a massive £15bn investment for the company, and the management has five more years to reach its goal.
If we multiply the current adjusted EBITDA produced by Openreach (£2.94bn last year) to get an estimate of how much the project could bring for the business once all premises are reached, that would result in a total of nearly £15bn in adjusted EBITDA being contributed by Openreach to BT’s bottom-line results.
Considering that the group’s total market capitalisation is currently standing at £14.1bn, the Openreach project is considered highly valuable for the company as it can single-handedly expand its valuation once – and if – it is completed as expected.
With this in mind, from a fundamental standpoint, shares of BT Group seem undervalued even if only 50% of the premises that Openreach plans to cover are reached in the next three to five years as that would lead to a significant expansion of BT Group’s adjusted EBITDA – adding at least £4.4bn more to the company’s total adjusted EBITDA using the estimates outlined above.
Using the last full year's figures, the group’s total adjusted EBITDA landed at £7.4bn. If we add these £4.4bn that would result in a forecasted adjusted EBITDA of nearly £12bn by the time 50% of Openreach’s premises are covered – all else being equal.
In that scenario, the company’s enterprise value (EV) to adjusted EBITDA ratio would be the following:
Current market cap: £14.5bn
Net debt (Q1 2021): £18.57bn
Forecast adjusted EBITDA: £12bn
Using data from Statista we can see that this forward-looking valuation indicates that BT Group stock might be undervalued considering that the average EV-to-EBITDA metric for the industry (telecoms) has stood in a range between six and seven in the past three years.
Furthermore, in July this year BT’s mobile business EE announced plans to roll out 5G across 90% of the UK by 2028, which could also serve as a positive BT share price driver.
This opinion has been drafted after performing a thorough analysis of BT Group’s fundamentals but should not be considered a recommendation to invest in BT stock.
BT share price forecast
Even though the technical set-up is currently pointing to a bearish short-term outlook for BT stock, a plausible BT share price prediction may see the valuation of the firm at least doubling if the Openreach project reaches at least 50% of its goal (12.5 million premises) during that period.
This view is shared by analysts according to data compiled by TipRanks from eight analysts currently covering the stock. At the time of writing (30 November), the average price target for BT Group shares is standing at 188.57p. Meanwhile, the lowest price target for the stock has been set at 125p per share and the highest at 260p per share.
Are BT shares a ‘buy’ or ‘sell’? The analysts share different opinions, with four holding a buy rating, two viewing the stock as a hold, and another two sharing a bearish sentiment and rating it as a sell.
Looking at it from a longer-term perspective, an algorithm-based BT share price forecast for 2021-2025 by Wallet Investor sees the price opening 2022 in a range between 155.7p and 167.35p, then declining steadily until reaching a range between 23.7p and 27.4p per share by the end of November 2026, based on the current trend.
When looking for BT share price predictions, bear in mind that analysts’ forecasts can be wrong. Analysts’ projections are based on making a fundamental and technical study of the company’s performance. Past performance never guarantees future results, however. Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money. Never invest more than you can afford to lose.
According to BT dividend history, distributions are paid two times a year. The ex-dividend date of the interim dividend typically takes place in August and is paid in September. Meanwhile, the ex-dividend date for the final dividend typically occurs in December and the payment is issued in February.
The company suspended its dividend in the last fiscal year amid the pandemic but management has resumed its dividend payments for the 2021/22 fiscal year at an annual rate of 7.7p per share.
The fundamental assessment of the business outlined above highlights the possibility that BT Group stock could be undervalued, as its forecasted adjusted EV-to-EBITDA ratio is standing below the industry’s average after including the positive impact that the Openreach project could have on the company’s earnings-generation capacity.
However, this assessment should not be considered a recommendation to invest in the stock as many factors could affect the management’s ability to accomplish its ambitious goals.
Nobody can predict with 100% accuracy what the price of a financial asset will do in the future. However, algorithm-based predictions from Wallet Investor see the price of BT stock declining in the future based on the current price trend.
According to the same prediction from Wallet Investor, the price could drop to a range between 23.7p and 27.4p per share by the end of November 2026. However, the fundamental analysis outlined above indicates otherwise. Investors are encouraged to make a decision upon performing their own due diligence on the company.
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