Taking a quick look at BT Group‘s (LSE: BT-A) share price lately, it seems a pleasant sight. Despite the Covid-19 pandemic, this British telecom leader is on the rise. As of 18 May, it is trading at around 170p, up an impressive 55% from 110p a year ago.
As a value investor, this recent jump has attracted my attention. I’m always looking for cheap shares that can diversify my portfolio, but I need to understand first if BT’s stock surge will likely continue.
Looking at BT’s financials
Like most businesses and individuals, 2020/21 has been tough for BT due to Covid-19. Rising costs related to the pandemic as well as fibre investments have hit BT’s bottom line. This was evident in its results for the year ending 31 March 2021.
Revenue fell 7% year-on-year (YoY) to £21.3bn due to these increased costs, pre-tax profit plummeted 23% to £1.8bn, and free cash flow slumped by 27% to £1.46bn.
It’s important to note though that much of this expenditure was necessary for growth. By investing heavily in full-fibre connections, BT is ensuring that it can keep up with the latest broadband offerings. That’s why management warned investors of further investment to come in 2021.
BT’s share price potential
BT appears to be making some brave decisions in relation to its media business lately. Having dived head-on into television media in recent years, BT is now considering the sale of BT Sports. Talks have apparently been held with mega-companies such as Walt Disney and Amazon, although it is still early days.
With a rumoured £12bn price tag on its sports offering, the sale could provide BT with a much-needed financial breather. The timing would be perfect too. The telecom leader is fully engaged in its capital-intensive project to roll out a large fibre optics network in the UK, to provide 25m households across the country access to high-speed Internet.
By reducing its exposure in the media sector, where it does not have much scale for growth, and increasing its efforts in the telecom industry, where it is a leader, BT could reduce losses and increase income.
Risks to BT shares
With roughly £18bn in debt, BT’s balance sheet is not the healthiest looking. Annual interest payment are nearly £800m. If this problem persists, it will have an impact on the business’s ability to grow.
If BT fails to find a solution to the money drain that is its sports division, these problems will only mount.
So, is BT Group a buy?
While there is never a guarantee of more to come for BT’s share price, I am cautiously optimistic. The company is clearly intent on getting back to what it does best: telecommunications. With 5G now firmly in the picture and BT’s dominance in the British market, where it holds an estimated 35% market share, a turnaround could well be on the cards.
I’ll be keeping an eye on BT’s share price over the coming months. If it manages to offload BT Sports, I will seriously consider investing.
