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The BT share price is starting to rise. Here’s what I’m doing now

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It has been a tough year for BT Group (LSE:BT-A) investors as the share price has dropped almost 40% since January. The stock has hardly been a stellar performer over the past few years, but is it now selling at a bargain price?

As a reminder, BT Group is a telecoms infrastructure business. Operating under numerous retail brands – BT, EE, Plusnet, and Openreach – the firm supplies approximately 35% of the UK population with broadband.

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On the enterprise-facing side of the company, BT owns and manages the UK’s core fixed network. Over 650 communications providers piggyback off the system to provide their customers with strong mobile signal for 2G, 3G, 4G, and soon 5G.

Why the BT share price has dropped

With such a diverse and far-reaching portfolio of services, it may seem odd that the BT share price has performed so poorly. The biggest problem is its level of debt. Building and maintain its communications network is a costly process.

The firm spent billions securing 3G licenses across Europe, repeated the process for 4G, and will likely repeat the story with 5G. It doesn’t help that the government restrictions on Huawei’s involvement with building the UK’s 5G network have added more pressure. As it stands, this pressure amounts to an expected £500m additional cost for BT over the next five years.

The company’s rapid growth during its early days created a vast need for cash flow that operations were simply not producing. So BT turned to debt financing and then seemingly never stopped. As a result, it now has over £27bn in long term obligations, including loans, leases, pensions, and tax deferrals.

Today, the total debt is nearly double the firm’s £10bn market capitalisation.

Furthermore, with the impact from Covid-19, the board of directors announced the suspension of all dividend payments until 2022. Subsequently, the share price fell to a 10-year low.

Light at the end of the tunnel?

The stock price has recently begun to rally following the release of the half-year report. Management raised guidance on the expected earnings before interest, taxes, depreciation & amortisation (EBITDA) from £7.2bn-£7.5bn to £7.3bn-£7.5bn. I’ve estimated this to translate into a net income of £1.6bn-£1.9bn.

Operationally, the business appears to be doing rather well. A new partnership with Belfast Harbour to deploy 5G was secured, improvements made to infrastructure have reduced annual costs by £352m, and the 5G network is now live across 112 cities around the UK.

Yet despite all this good news, revenues and profits continued to fall by 8% and 20%, respectively. However, a very positive sign was the repayment of £720m of debt. This doesn’t solve the solvency problem by a long shot, but it’s nice to see debt levels finally begin to decline.

The bottom line

Such a sharp rise in share price on what appears to be mediocre news tells me the stock is vastly undervalued. However, given the state of the balance sheet, I’d much rather invest my money into a company which isn’t riddled with liabilities.

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Zaven Boyrazian does not own shares in BT Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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