What a difference a few weeks makes. When Tempus peered at BT after its annual results in May, the pluses and minuses seemed finely poised. Now the balance of risk has moved decidedly to the positive.
There have been two significant events. On June 10, Patrick Drahi, the French-Israeli-Moroccan billionaire, revealed a 12.1 per cent stake in BT, making him the biggest shareholder. And last week Philip Jansen, the chief executive, effectively called the bottom of the market in the shares, saying that four or five years’ decline were over and that he could see a path to growth on the back of “super-heavy investment”.
Drahi confirmed that he supported BT’s strategy and held management in “high regard”. He said that he had made his investment because BT had “a compelling opportunity to deliver one of the UK government’s most important policies, namely the substantial expansion of access to a full-fibre, gigabit-capable broadband network throughout the UK”.
It is hard to disagree with someone who slaps more than £2 billion on the table, particularly when that person seems to know what he is talking about. Drahi — who began his career laying television cables in southern France — is founder and chairman of Altice, the French telecoms group that has more than 40 million customers. He also owns Hot, an Israeli cable TV station.
On the BT share register Drahi sits alongside Deutsche Telekom, which has 12.06 per cent of the shares and a seat on the board. Drahi apparently has not asked for a similar courtesy yet. Their combined 24 per cent holding, which could easily be tipped over the legally significant 25 per cent, is an obvious springboard for a takeover bid. Drahi has ruled himself out of doing that until at least December and it is doubtful whether an administration as libertarian as that of Boris Johnson would nod through BT becoming foreign-owned. But such large shareholdings often lead to corporate dramas of some sort.
While Jansen diplomatically welcomed Drahi in his speech to The Times CEO Summit last week, he had a bigger message: BT is back. “We’ve been declining for four or five years,” he said. “I expect us to see growth in this year and then we are going to see a path to growth. We are putting in £5 billion a year of investment for the next four or five years and we’ve got to get a return for that. And the great thing is Patrick sees the opportunity to do that.”
Impressive though that sounds, BT has been investing between £3.4 billion and £4 billion a year since 2017, the years of decline in Jansen’s view. Another £1 billion or so should help, but is not enough in itself.
The key, as ever, is how effectively the cash is deployed. The latest holy grail is full-fibre 5G broadband, which should be rolled out across the UK by the end of next year. But signal strength will continue to be an issue in some places and the National Cyber Security Centre website warns that a successful cyberattack on 5G could cause “real problems”, especially if we are depending on it for such refinements as self-drive cars and remote surgery, let alone dog collars and remote control of home lighting and heating.
Then there is the little matter of where the money is coming from. BT’s latest annual report shows some chunky debt maturities in the next few years. Doubtless they will be rolled over, but interest rates may be steeper by then.
That report talks of a simpler, more dynamic BT, but makes no mention of the old state monopoly’s culture. It shouldn’t be lingering 37 years after privatisation, but it still oozes from every customer-facing pore. Jansen must face up to that. Yet, if he is right, the shares’ low point was a Covid-riddled 98p last July. They have doubled since then, but the price-earnings ratio is at an undemanding 10.5 times 2020-21 profits.
Advice Buy
Why Patrick Drahi should keep the company’s management on their toes
Micro Focus international
Searching for good news in yesterday’s Micro Focus International interim results felt like panning for gold in a sewage farm. It’s there, but you had to know where to look.
The company’s shares fell by almost 81p, or 14.8 per cent, to 466¼p, not so much on the expected loss as the lack of forward guidance.
“While there is a great deal to do, we are encouraged by our progress and remain committed to delivering revenue stabilisation and sustainable cashflow generation for our shareholders,” was the best that Stephen Murdoch, the chief executive, could muster.
The company supplies tailor-made business software. Its problems stem from a $8.8 billion cash-and-shares takeover of Hewlett-Packard software operations in 2017.
Within six months, the share price had halved after the management admitted that it had been overwhelmed by difficulties integrating the two businesses. The pandemic has not helped the recuperation. Legal headaches still lurk, although they seem to have been fully provided for. However, this could mark the beginning of the end of the bad news.
Murdoch showed greater confidence in his presentation to analysts yesterday, underlined by an interim 8.8 cents dividend that he promised to treble for the year as a whole.
Numis, the stockbroker, said that stabilising the firm’s revenue by the end of fiscal 2023 was crucial, adding: “In our view, the share price is highly sensitive to progress towards that goal, with the potential to rise 150 per cent to 200 per cent if achieved, but with risk in a downside scenario.”
While it appears that many American investors who joined the Micro Focus share register through the Hewlett Packard deal have lost patience, the group is still backed by M&G, Fidelity, Vanguard and BlackRock.
Tempus recommended avoiding the shares a year ago, but the price movement since last November suggests that this could be the time to hitch a ride.
Advice Buy
Why The company may be turning the corner at last
