Thinking of buying the BT share price? Read this first

Roland Head updates his view on BT Group plc (LON:BT.A) and highlights another potential turnaround opportunity.

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Shares of BT Group (LSE: BT-A) have fallen by almost 50% over the last three years. The stock now trades on less than 10 times forecast earnings and offers a forecast dividend yield of about 6%.

My view on this stock is no secret — I bought BT shares earlier this year. In this piece, I want to take a look at the group’s latest figures. Would I still be happy to buy BT today?

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A good start

Half-year figures published earlier this month suggested that outgoing chief executive Gavin Patterson is making good progress with his turnaround plan. Revenue fell by just 1% to £11,624m and the group’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 3% to £3,675m.

Adjusted after-tax earnings rose by 4% to 13.3p per share, in line with forecasts for a full-year figure of 25.9p per share. These gains were driven by a strong performance from the group’s consumer business, where revenue rose by 3% to £5,272m and adjusted EBITDA climbed 8% to £1,221m. This improvement helped to offset continued falls elsewhere.

There were only a couple of small disappointments, in my view. The first was that normalised free cash flow — a useful measure of cash generation — fell by 22% to £974m. The second disappointment was a 5% cut to the interim dividend, which fell from 4.85p per share to 4.62p per share.

Wait for the new guy

Mr Patterson’s turnaround strategy looks promising. But he won’t be in charge for much longer. His replacement, ex-Worldpay boss Philip Jansen, takes charge on 1 February.

As I’ve explained before, I think Mr Jansen’s arrival carries some risk of a dividend cut. But despite this risk I remain confident that he’ll be able to make the changes needed to return BT to sustainable growth and bring the group’s £12bn net debt down to a more comfortable level.

In my view, BT shares remain a decent buy at current levels.

Another turnaround with a new boss

BT isn’t the only big-cap income stock that’s been struggling to perform. FTSE 250 bus and train operator FirstGroup (LSE: FGP) has lost 20% of its value so far in 2018. Falling profits last year and a failed takeover bid in May left the group looking for a new boss.

Today’s half-year results suggest good progress is being made in several key areas. Adjusted revenue rose by 19.2% to £3,303.3m during the six-months to 30 September, while operating profit was 3.4% higher, at £92.4m.

Free cash flow for the half-year period rose from £160m to £210m. This helped to fund an 11.2% reduction in net debt, which fell to £1,047.7m.

Reducing this figure further will be a key focus for the firm’s new chief executive, who was revealed today as Matthew Gregory. Mr Gregory’s previous role was as chief financial officer, so he knows the company well. In a statement today, he confirmed that the outlook for the full year is unchanged.

Based on the latest broker forecasts, this puts the group on a forecast price/earnings ratio of just 6.3 for the year to 31 March.

I’m encouraged by the firm’s strong cash generation and falling debt. In my view, FirstGroup could be a turnaround buy at current levels.

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