At today’s 468p share price BT Group (LSE: BT.A) is up almost 17% since January. Is that a trick the firm can repeat during 2016?
City analysts following the firm expect earnings to expand by 7% for the year to March 2017. That puts BT on a forward price-to-earnings (P/E) ratio of almost 15. And the forward dividend yield runs at 3.2% with those earnings covering the payout just over twice.
A successful rollout
The valuation looks about right to me, so there’s no obvious potential for the shares to re-rate upwards on valuation grounds. If BT’s shares are to perform well next year, we’ll need strong news flow regarding growth
Much hinges on the rollout programme for fibre broadband. Back in October BT said it continues to invest heavily to help the UK remain a broadband leader among major European nations. The figures are impressive. The firm’s open access network now passes 24 million premises in Britain and counting. Meanwhile, the directors reckon that demand for fibre is robust and five million homes and businesses are already connected.
So BT has obvious growth potential. But let’s not forget that the share price has already risen more than 520% since 2009. There’s a fair amount of cyclicality in BT’s business, which means the firm’s valuation has potential to contract as we move through the more mature phase of the current economic cycle. I wonder whether valuation-compression might hold back total returns for investors from here, even as growth continues. I’m cautious on BT now.
Impressive growth
I’m more attracted to FTSE AIM company AdEPT Telecom (ADT). The firm provides fixed line calls, line rental and broadband telecom services to commercial customers, ranging from small businesses to nationwide chains that have hundreds of branches. As well as organic growth, Adept pursues an acquisition programme with the aim of consolidating the telecom services industry. Growth has been robust and the shares are up 1325% since 2010, but there’s good reason to think that there’s more to come.
AdEPT won three framework contracts – for national and local governments, and for academic institutions. That happy situation now means that the firm is a nominated supplier and starting to win big contracts, such as the telecom services for whole councils. Meanwhile, a new £15m revolving credit facility has sufficient capacity left over after a recent acquisition to fund further purchases of earnings-enhancing businesses. The directors are relaxed about funding acquisitive growth with debt, citing the firm’s strong cash generation as justification.
At today’s 285p share price, AdEPT Telecom trades on a forward P/E rating around 15 for the year to March 2017 and there’s a forward dividend yield of 2.5%. City analysts following the firm expect forward earnings to cover the payout 2.6 times.
I think there’s a good chance that AdEPT Telecom could outperform BT during 2016. At the very least the firm is worthy of further research and inclusion on my watch list. One thing that I can’t deny is the blistering operational performance of the company so far.
