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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.


British Telecom


British Telecom (BT:LSE) 2005-04-07

British Telecom is probably one of the most well known companies in the country and it is big. Market capitalization is 16 billion. It sits at fifteenth in the FTSE100.

Nobody can fail to know the nature of this company’s business - Telecommunications..

This was one of the first national companies to be privatised and is a share that has gone from a star performer to a dog.  From boring ex-government owned national telephone system operator to a tech share gambler’s play, it rode the crest of the boom a few years ago with the shares going as high as 1499p at the end of 1999. They were then comprehensively dumped until they bottomed out at about 143p in March 2003. After that, there followed a gentle rise to the current level, with one or two blips
on the way.
BT’s price history has a rollercoaster profile, considering its a major blue chip share that is also a quasi-regulated utility. The company was held back by terrible management, and got into the situation of carrying a stupendous debt burden, so great that it looked quite possible at one time that it could go down under the strain. This was primarily to do with licences being auctioned off by the government for the mobile phone system called 3G, for which astronomical prices were paid.
This was a sad time for BT and its shareholders. Consequently, something had to give. Emergency survival measures were put into operation, one of which was abandoning the dividend for a period and another was floating off the mmO2 mobile phone company as a new listed entity. Employee numbers were also slashed. The measures have worked so far, in that debt has been reduced dramatically, the dividend restored, and earnings per share has risen.

As at 31 March 2004 debt stood at £8.4bn compared with shareholders’ funds of £3.1bn. relatively speaking, this is a big improvement, when you consider that the debt stood at £27.9bn at 31 March 2001!
Importantly, normal business cash flow is now the principal source of debt repayment. This indicates that the company must be in a reasonably healthy state, managing to pay off borrowings in this way.

BT does not scream “Value” but with a low P/E of about 10 on the 2005 consensus earnings per share forecast of 18.5p, and a decent yield of about 5.5% on the 2005 dividend forecast of 10.5p, it represents a good buy compared to its peers. 

BT could be due for a rebound in the near future, following its near catastrophic recent history. Despite the obvious value downsides, there may well be a value upside as well as that indicated by the P/E and yield.

BT will not go straight up from here.  There is still substantial risk which the market recognises by giving it a modest rating. But, the market may well be overdoing the caution given the great turnaround made by the company since its darkest days a few years ago. The shares are still not far off their lowest point. The company has recently commenced a share buyback programme.

Buy BT (BT:LSE). At below 200.00p BT  has some value locked in, and should have plenty of upside scope.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.