Traffic may have decreased on roads and railways, but broadband and mobile phone networks have picked up the slack during the lockdown as consumers have worked, shopped and played online (Simon Duke writes). Investors in BT, Britain’s largest internet and phone provider, may have hoped, therefore, that the pandemic would prove its worth, but it was not to be. The shares have fallen by 10 per cent since the start of the year.
Philip Jansen, the company’s chief executive, is partly to blame. In a blow to its army of small investors, he suspended the dividend and warned that payouts would be far lower in future. To compound the misery, O2 and Virgin Media are merging, making for more robust competition. With little prospect of a return to revenue growth, BT shares are marooned at levels last seen in the aftermath of the financial crash.
In recent weeks, though, BT appears to have attracted the gaze of a new class of patient investor. Last month the shares bounced after the Financial Times reported that the company had held talks with infrastructure funds over a sale of a stake in its Openreach network division. Mr Jansen, 53, said it was not so.
BT’s stock ticked higher again yesterday — closing up 1¾p, or 1.5 per cent, at 120¼p — after reports that Saudi Arabia’s sovereign wealth fund has been quietly building a holding. The company declined to comment.
These speculative pieces tell prospective shareholders two things. First, that BT may need outside help to upgrade its broadband network. Mr Jansen aims to connect 20 million businesses and homes directly to fibre by the mid-to-late-2020s, from only three million today, at a cost of £12 billion. Second, that BT is sitting on a potentially highly attractive asset. Some analysts believe that Openreach is worth more than £20 billion, which dwarfs BT’s £12 billion market cap.
BT carries much baggage. Formerly part of the Post Office, it became one of the marquee privatisations of the Thatcher era, floating in 1984. But it has suffered two near-death experiences. In 2001 it had to offload its mobile network and directories businesses. In 2008 its profits and share price collapsed after an implosion at the global services unit. The latest downturn began in earnest in 2017 with an accounting scandal in Italy.
The company has £18 billion in net debts and has been weighed down by its final-salary pension scheme. Yet the retirement burden could ease after its forthcoming triennial review. In its most recent accounts, BT reported a fall in its pension deficit from £6 billion to £1 billion thanks to a rise in bond yields.
The group owns EE, Britain’s largest mobile phone network, but its prize asset is Openreach. Mr Jansen hopes to pay for the fibre rollout from cashflows and will save about £2.5 billion by suspending the dividend. Some analysts are sceptical, fearing that he will have to find a co-investor or will need to raise money through a share sale.
What is beyond dispute is the long-term value of fibre networks, which are expensive to build but will throw off prodigious amounts of cash for years to come. The mood music from Whitehall should give Mr Jansen some comfort. The government has made universal fibre broadband a priority.
BT faces competition from a clutch of well-funded fibre players, but if Mr Jansen gets it right, Openreach will be the dominant provider of fibre broadband for years to come.
In May, this column advised potential investors to avoid BT as the journey to the future would be arduous and expensive. However, for those willing to weather a few years of turbulence, BT is worth a look.
ADVICE Buy
WHY Shares are cheap but be prepared for a bumpy ride
John Menzies
The turbulence that has buffeted the aviation sector over the past three months has left investors distinctly green around the gills, so shareholders in John Menzies took some cheer yesterday from a trading update indicating that the company had managed to generate positive cashflows in the second quarter (Greig Cameron writes).
Although revenue in April and May at the Edinburgh-based fuelling and luggage-handling company was down by about 64 per cent year-on-year, in line with guidance given in March, Menzies said that it had yet to incur any bad debts, was “tightly managing” outstanding payments due from customers and pointed to an expected revival in activity from July. It has suspended its dividend and has taken a range of cash- preservation measures, including furloughing almost half its workforce.
Menzies’ directors expressed confidence that the company has enough financial muscle to see it into next year. However, it is also in “constructive discussions” about a revised covenant structure with its lenders, which it says will need to be in place until next year. The trading update ended on a bullish note, with a suggestion that any aviation services groups that emerge from the pandemic successfully will have significant opportunities to grow. Analysts at Berenberg agreed, saying that Menzies had a strong balance sheet and would benefit from its global scale and diversification.
When this column looked at John Menzies in October last year, the world of aviation services was a little different. A “buy” recommendation, with the shares at a relatively weak 391p, was based on the company’s decent dividend prospects and strong long-term growth potential. By January the shares had reached 480p — but then the landscape changed dramatically. Looking ahead, global air travel will return — eventually — to more normal operations and as analysts at Peel Hunt pointed out, the long-term potential of the aviation services market remains.
The shares, which sank to 75p at the end of March, have since regained some altitude and rose 10½p, or 7.4 per cent, to 154½p yesterday. Those already buckled up should settle in.
ADVICE Hold
WHY Better placed to ride out storm and win new business
