The coronavirus pandemic has extended a multi-year decline in the BT (LSE: BT-A) share price. It collapsed from 500p in late 2015, hitting an intraday low of 98.4p last week. Looking at the five-year performance figures of FTSE 100 companies, only British Gas-owner Centrica has seen a worse fall than the BT share price.
However, could the telecoms group now be primed for a roaring recovery? Indeed, with the shares still not too far above a quid today, could this be the perfect time to buy?
Low BT share price, but…
BT’s debt and pension deficit are legendary. As such, the balance sheet is always my first port of call when the company publishes its results.
In its latest annual report, net debt at 31 March stood at £18bn. This was up from £11bn a year earlier. But it isn’t quite as bad as it looks at first sight. Some £6.5bn of the £7bn increase was due to a new accounting standards rule on the treatment of lease liabilities. Meanwhile, the balance sheet also showed a welcome £6.1bn reduction in the group’s pension deficit. It fell to £1.1bn from £7.2bn.
Nevertheless, BT’s liabilities remain onerous, being higher than shareholders’ equity of £14.8bn. Generally, I like to see debt lower than equity and, ideally, less than 50%. However, the risk/reward trade-off can be compelling in some situations where the balance sheet is relatively weak. Could BT be one of them?
Investing for growth
The headline news from the results was no final dividend, and the suspension of dividends for the year to March 2021. This will protect the company’s investment grade credit rating, and free up £2.5bn in cash flow for other uses.
In addition, management announced a new cost transformation plan. At a one-off cost of £1.3bn, it’s expected to deliver annualised gross benefits of £1bn by March 2023, and £2bn by March 2025. Finally, analysts at Jefferies reckon up to £800m capex a year will be freed up from projects coming to an end in the next two years.
Putting all this together, I reckon BT’s debt level is manageable. I’d also say chief executive Philip Jansen, who successfully allocated capital for growth at Worldpay, has the firepower to do the same at BT. Central to this is his £12bn plan to connect 20m homes to full-fibre lines by the end of the decade.
Scotched rumour
Last Thursday, the Financial Times published a story claiming BT was in talks to sell a multibillion-pound stake in its Openreach division. According to the FT‘s sources, the talks had been going on for three weeks.
The story seemed inherently implausible. Not least because it would have made Jansen’s £2m purchase of BT shares on Wednesday illegal insider dealing. The story was scotched by an Openreach internal memo quoted by the Evening Standard, and by BT’s finance director on a scheduled conference call with analysts.
Value in the BT share price
The FT story has, however, highlighted the potential value in the BT share price (currently 110p) and market capitalisation of £10.9bn. Analysts’ valuations of the group’s Openreach business alone range between £12bn and £25bn.
Due to the discount valuation, my optimism about the manageability of debt, and the chief executive’s investment-for-growth strategy, I rate BT stock a ‘buy’.
