Given the glacial pace of its business transformation, BT’s revenue growth has been hard to come by. In 2020, when the economy slowed down due to Covid-19, the utility company even had to cancel dividends (check out BT’s dividend history here). So at the moment, the market is just extrapolating BT’s current results into the next few quarters.
Is BT overvalued or undervalued?
‘About right’ is my opinion. The stock has had a strong rally in 2021 where prices surged from 100p to 200p (perhaps due to the accumulation by one large institutional investor).
BT’s recent half-year results show static revenue of £10.3 billion and net profits of £893 million. Half-year interim dividends stood at 2.31p. Normalised free cash flow (NFCF) has dropped significantly from the previous year. So the company CEO Jensen had to increase cost-savings target to £3 billion by FY25. Net debt stood at £19 billion.
BT Group has a sticky business model with plenty of recurring revenue. This the market likes. But BT’s costs are large too, with hard-to-ignore items like pension deficits, network upgrades, and most recently, workers’ strikes. These the market doesn’t like.
Therefore investors are right to value the company at a low multiple. The stock’s Price-Earning ratio stands at a reasonable 7.4 while the current yield is at 6%.
Source: BT Group Plc
When the overall market is at its lowest point. Remember BT’s business is cyclical too. The company reported losses when the wider economy was struggling; and had to eliminate dividends during the difficult time too (the pandemic).
Technically, the company may test the long-term support (at psychological 100p) in the weeks ahead if the macro conditions tighten again.
For now, the stock is trading within the 110-130p range and may consolidate in the weeks ahead as the resistance at 130-135p reasserts. The stock is in a defined downtrend.
But for long-term investors, double-digit BT share prices could be a worth a punt as that would place BT’s market cap below £10 billion (there are 9.9 billion shares outstanding). That valuation in my view would be pricing BT at a too-negative scenario.
