As falling knife stocks go, BT Group (LSE: BT-A) has been a biggie. It has lost half its value after peaking at 497p exactly three years ago, plunging far, far faster than the FTSE 100 as a whole. That could be about to change. Here’s why.
1. 2018 has not been so bad
The great BT share price crash was triggered by a host of nasties, including a £500m accounting scandal, its £14bn pensions black hole, the exorbitant cost of Premier League broadcasting rights, and tougher trading conditions.
Underlying earnings also slipped amid tougher competition in the telecoms sector, while investors were spooked by its £9.5bn net debt mountain, and sizeable capital expenditure plans. The result: Royston Wild wouldn’t touch it with a barge pole.
Yet the worst appears to be over. The bad news is mostly out there. Its stock hit a six-year low in May, but is up 27% in the last six months, against a drop of 6.3% on the FTSE 100 over that time. Things are not as bad as you thought they were.
2. The turnaround has started
Chief executive Gavin Patterson is leaving and new broom Philip Jansen, former Worldpay boss, sweeps in on 1 February. Blue-chip company bosses are like football managers, a fresh face gives everybody a lift. In fact, the recovery has already started with Patterson presiding over a 3% rise in half-year adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to £3.67bn, while revenue fell just 1% to £11.62bn.
Given recent travails, this is a good result. Yes, the interim dividend was cut by 5% to 4.62p per share, but a few could live with that as BT has been massively generous given its current plight. Patterson was able to claim that the group has generated positive momentum with “improved customer experience metrics, accelerating ultrafast deployment and positive progress towards transforming our operating model.” This knife is no longer falling.
3. BT rings up the right numbers.
BT’s share price may have rebounded strongly in recent months but there may still be a buying opportunity here, judging by its price/earnings valuation. It currently trades at 9.9 times forecast earnings, well below the 15.97 average across the FTSE 100 as a whole. So if you are tempted by the recent pick-up, you haven’t missed your chance.
The other attractive number is the yield, currently a forecast 6%, with cover of 1.7. That beats the FTSE 100 average of 4.25%. Be warned, Jansen could announce his tenure by dialling down on this generosity. However, unless he’s really vicious, a rebased payout still should offer a decent income.
Forecast earnings growth is not so attractive, with analysts pencilling in a drop of 5% in the year to 31 March 2019, then another 2% the year after. Jansen will have a lot on its plate, as BT faces fierce competition from rivals, a struggling IT services unit, and criticism of its broadband roll-out plans. There is also the multi-billion pensions black hole and its debt pile, now almost £12bn, up from £9.5bn over the last year. BT still has some way to go. It’s your call.
