The past two-and-a-half years have been really hard for shareholders in BT (LSE: BT.A). But the telecoms giant, which has been struggling to find its footing, could be about to finally get its game plan in place. Senior management changes are afoot, and the company is increasingly speaking to the media about its restructuring and investment plans and how they are adapting to the changing times.
Restructuring
BT has unveiled an ambitious restructuring plan aimed at tackling its high cost base and simplifying its business model. The former phone monopoly is now expected to eliminate 13,000 managerial and administrative jobs in an effort to eventually save £1.5bn a year.
But it’s not just on costs that BT hopes to deliver improvement — it’s also looking towards generating top-line growth and is funding increased investments in its wireless 5G and fibre broadband networks. The new strategy comes after the group’s recent disappointing full-year results showed it taking a 3% drop in fourth-quarter revenues to £5.97bn.
Looking ahead, with CEO Gavin Patterson’s departure later this year, there’s scope for further changes to be made to its strategy and a possible expansion in its restructuring plans. What’s more, there’s also the opportunity to potentially reset relations with top shareholders and the regulator Ofcom, both of which had become strained under Patterson in recent years.
Well-placed
Much of the stock’s long-term investing thesis lies with the group’s consumer-facing business, which has been the primary source of revenue growth for the past couple of years. In this space, BT is well-placed to benefit from the continuing shift towards converged services from a single supplier in the consumer market. The UK is ripe for more converged services, given that such multi-play bundles in the UK account for a smaller share of the market than many European countries.
Although BT’s pay-TV service has struggled, the group is by a wide margin the biggest broadband and wireless telecoms operator, giving it a very significant advantage in terms of scale. It claims to have already achieved £290m in annual cost synergies from its acquisition of EE and will likely have more to gain through rationalising sites and shared fibre investments further down the line.
7.1% yield
The company, still reeling from a disastrous accounting scandal at its Italian business, saw its share price slump to more than a five-year low of 201p in May. The shares have recovered somewhat in recent weeks on its announcement of a new strategy, but valuations for the company remain undemanding.
Shares in BT now trade at just 8.2 times its expected earnings this year, while offering a very tempting dividend yield of 7.1%.
Multiple headwinds
On the downside however, a turnaround for the shares doesn’t seem imminent. The group, which is under growing pressure to invest much more in its fibre infrastructure and to reduce its £11.3bn pension deficit, has only just managed to hold its dividend flat for the next two years, after abandoning plans to grow annual dividends by 10% until 2019.
Meanwhile, its business and public sector services division has been hit by a dearth of new contracts, and competition is hotting up in the sunnier consumer market. Amid the high cost of programming and price cuts from some of its competitors, margins are being squeezed in the retail division.
Brexit has also created other headwinds, as weak consumer confidence could cause would-be customers to reconsider the importance of the kind of high value bundles that BT would like to push, while continuing uncertainty from ongoing UK-EU talks could mean more businesses will hold back new investments for longer.
Is trouble looming?
Elsewhere, shares in the satellite communication business Inmarsat (LSE: ISAT) fell sharply this week on news that rival French group Eutelsat ruled out a bid for it.
The company, which previously rejected a bid approach from US peer EchoStar, is rumoured to be the target of several rival firms amid ongoing consolidation in the satellite communication industry.
Under intense competitive pressures in the market, Inmarsat has been going through a difficult patch as excess capacity in the industry weighs on pricing. The company, which recently cut its dividend by 60%, saw pre-tax profits fall by nearly a quarter to $230m last year.
Looking ahead, it has warned about a “lack of visibility” around future cash payments from Ligado Networks, an important US partner that leases spectrum in North America. The payment uncertainty from Ligado, a company which has had difficulty in obtaining a licence from the Federal Communications Commission, could have a significant impact on Inmarsat’s free cash flows at a time when the company needs to push ahead with big capital investments.
Lucrative airline sector
It is looking to expand in the lucrative commercial airline sector, a market which is booming on fast-growing passenger demand for on-board Wi-Fi internet. The company predicts in-flight broadband will generate $130bn of total revenue for the entire sector by 2035.
Orders from the airline industry are increasing, and revenues from the sector climbed 39% in the first-quarter of 2018. On the downside, it will take some time before growing revenues from this division become a significant source of profits because of high investment costs and aggressive pricing by rivals to capture market share. After all, Inmarsat needs to invest in its next-generation network and establish itself in the market in order to compete.
Near term, there’s not a lot to look forward to. There are few signs that competitive pressures will ease any time soon, while City analysts expect underlying earnings to decline by another 11% this year. Valuations aren’t tempting either — its shares trade at a pricey 21.2 times forecast earnings.
