BT (LSE: BT.A) shares rose 25% in the past three months. They also outperformed the FTSE 100 index, which rose 12% in the same period.
BT shares’ recent trading update
BT released its third-quarter trading update on 4 February 2021. Revenue for the nine months ended 31 December 2020, fell 7% to £16.06bn. The drop in revenue was primarily due to the negative impact of Covid-19 on the company’s consumer and enterprise units, legacy product declines, and divestments of domestic businesses in Spain, Latin America, and France.
Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) fell by 5% to £5.6bn. One of the reasons for the fall in EBITDA is the drop in revenue, which was partially offset by the first half sports rights rebates, savings from the company’s modernisation programme, and other cost initiatives.
The company’s profit before tax fell by 17% to £1.6bn. Normalised free cash flow also fell by 17% to £830m. Capital expenditure increased by 5% to £3.03bn, primarily due to the increased fixed and mobile network investment.
Management expects no material impact from Brexit and the year-to-date results are in line with the estimates. The lower end of normalised free cash flow for the full fiscal year 2021 has been raised to £1.3bn. The revised range is between £1.3bn to £1.5bn; the EBITDA outlook remains the same as the earlier estimates of £7.3bn to £7.5bn.
Strategic developments
The company has created a new digital technology unit. It will enable the company to accelerate the digital and business transformation programmes. Management believes that digital innovation will be at the core of BT Group’s future success.
Another focus area for the company is 5G. It has 5G live in 125 towns and cities. The number of 5G-ready connections has reached 2.1 million, adding more than 900,000 in the third quarter. The company’s 4G network now covers more than 85% of the UK.
Openreach’s FTTP network has now crossed 4.1m and the company is on track to reach its target of 4.5m by March 2021. BT has also launched Halo 3+, which combines the power of the full fibre and mobile networks in one hybrid router.
BT had suspended its dividend in May 2020 in the light of the Covid-19 and to fund the five-year transformation and modernisation program. It plans to invest its annualised savings in full-fibre broadband and 5G in the UK. The company plans to restart dividends in the fiscal year 2022 at an annual rate of 7.7p per share.
Risks to consider in BT shares
The telecom industry is facing a lot of challenges due to the rapid technological changes. It also involves a lot of capital investments for building up new infrastructures. BT is also facing competition from new players who are giving better offers to grab market share.
In spite of all the challenges, I would like to buy BT shares in the next few months, as the company is still a market leader in telecom in the UK and is one of the beneficiaries of the 5G services. It is a large-cap company and lastly, the shares are available at a price-to-earnings ratio of 8.25, which I consider is a value buy.
