At 103p (30 April), the BT (LSE: BT.A) share price is near its lows. Is the stock a bargain? Can it rocket higher like it has before?
City analysts are divided. Some have the telecoms company as a strong buy while others reckon it’s a buy. A few recommend we hold the stock and at least three think it’s best to sell the shares.
Maxed-out on borrowings?
There are some challenges in the business. One of the biggest is the huge pile of borrowings on the balance sheet.
Net debt in 2018 was just under £11bn, but the latest figure was £19.7bn. That compares to the market capitalisation of around £10.45bn.
That means the net debt is almost twice the size of the equity. For many industries, that level of borrowing would be high. However, BT has substantial asset backing because of its telecommunications infrastructure.
Earnings provide about three-times cover for the firm’s interest bill. However, net profit and earnings per share look set to be lower in the current trading year to March 2025. If that trend continues, the debt load could become problematic.
Investing for growth in earnings
Meanwhile, BT’s share price has been down here before. In 2009 it was well below 100p before rallying to just under 500p by 2015. The question is, can it repeat the trick and give shareholders a multi-bagging investment again?
Maybe it can. One of the reasons for the increasing levels of debt is the company has been investing billions into the business. The reason for doing that is to drive growth in revenue, cash flow and earnings.
New chief executive Alison Kirby said in February the company’s been ‘upgrading’ and attracting new customers for the firm’s full-fibre and 5G networks. Prior investments in that infrastructure had just delivered “another” quarter-year of growth in revenue and earnings before interest, tax, depreciation and amortisation (EBITDA).
However, the cynic in me knows that companies tend to focus on EBITDA when there isn’t much to shout about regarding earnings per share.
Meanwhile, in the nine months to December 2023, net debt rose by 4.2% compared to the £18.9bn reported on 31 March 2023. The company explained the increase as “mainly” pension scheme contributions.
The finances look set to improve ahead
There are some positive signs. For example, the employee pension scheme will likely be fully funded by 2030. Between now and then, the business aims to contribute around £600m a year to fund the deficit. However, there’s now an end in sight for that ongoing money-drain.
Meanwhile, the full fibre broadband offering is already available to more than a third of homes and businesses in the UK. That suggests a declining need for capital investment into the system over the coming years.
On top of that, last November the company reported lower capital expenditure of 11%, with smaller fixed network spend because of smaller unit build costs for fibre-to-the-premises (FTTP).
If these cash-sapping expenses continue to ease — and if customer uptake grows — we may see improving profitability ahead and a rising share price. Although positive outcomes are never certain.
Nevertheless, ‘buy low, sell high’, goes the old stock market saying. On that basis, BT looks well worth further research and consideration now.
