Not surprisingly, perhaps, the board of BT has been painfully aware of the decline in the company’s share price (Alex Ralph writes). In early May Philip Jansen, the telecoms group’s chief executive, told the City that he was “very conscious” of the perceived undervaluation in the market of its Openreach broadband infrastructure business. Reports — quickly denied — followed that BT was in the early stages of discussions over a potential multibillion-pound stake sale of Openreach. Then there was talk that Saudi Arabia’s sovereign wealth fund had been building a holding.
Most recently, over the weekend, reports surfaced that the board was preparing to defend BT against takeover approaches from industry rivals and buyout firms. Bankers at Goldman Sachs had been asked to update its defence strategy, Sky News said.
That news lifted shares in BT, which had been marooned at ten-year lows, by 7¼p, or 7.1 per cent, to 109p yesterday.
BT is Britain’s biggest telecoms group and was privatised in 1984. In addition to Openreach, it also owns EE, the mobile network, BT Sport, the broadcaster, and a global services division for businesses. The company’s shares have been in decline over the past five years since hitting a peak of about 500p.
The group has tried to restructure after a costly accounting scandal in its global services business in Italy, but its efforts have been hampered by several factors, not least increased competition after this year’s agreed £31 billion merger of Virgin Media, owned by the Liberty Global conflomerate, and O2, the mobile network owned by Telefónica. Amid pressure from Boris Johnson’s government for the telecoms industry to accelerate delivery of “gigabit” broadband speeds to all premises by 2025, BT is investing £12 billion extending Openreach’s full-fibre network to 20 million addresses by the mid to late 2020s.
To help to pay for the investment, BT has suspended its dividend until 2021-22, saving £3.3 billion, and is spending £1.3 billion as part of a modernisation programme to deliver savings of £2 billion over five years.
The reports of a potential stake sale in Openreach this year attached a valuation of about £20 billion on the division and analysts value Openreach at significantly more than BT’s present market capitalisation of £10.1 billion. BT’s sum-of-the-parts valuation is 228p, according to analysts at Credit Suisse, and it trades on a forward earnings ratio of about 5.8 times.
However, there remain uncertainties over the returns that BT will generate from full-fibre expansion. Ofcom is not due to finalise regulation until the first quarter of next year and BT remains in talks with providers, such as Talktalk, over wholesale deals. Another uncertainty facing any potential bidder is BT’s pension deficit, estimated at £9 billion.
BT’s key role at the centre of Britain’s full-fibre broadband network at a time of increased awareness about connectivity during the coronavirus pandemic would mean that support from the government in any takeover of BT almost certainly would be needed. Alongside the government, Deutsche Telekom is another key stakeholder — the German group is BT’s biggest shareholder, with a 12 per cent stake and board representation.
Despite the clear obstacles to a takeover, such speculation should support BT’s share price and any risks, as Berenberg bank pointed out this month — including threats to an economic recovery, the return of sport, a pension agreement and improved clarity on Openreach returns — should begin to lift.
Devro
As the only London-quoted supplier of edible sausage casings, Devro is a unique proposition (Greig Cameron writes). Along with traditional sausages, it is catering to a growing market for its casings in protein-based snacks, which are popular in sports nutrition.
It withdrew its final dividend for 2019 in April to preserve cash amid the pandemic — but investors cheered when it decided last month that a 6.3p payment was to be reintroduced. Results for the six months to the end of June showed flat revenue of £119 million, but underlying pre-tax profit rose by 5 per cent to £15.6 million. So shareholders will receive a 2.7p interim dividend relating to the performance in the first half of this year, with an additional 6.3p in place of the one withdrawn in the spring.
In spite of a solid performance, the company acknowledged there had been an impact from Covid-19. Although volumes of edible collagen rose by 1.4 per cent in the first half, there was a drag on sales in the second quarter. That was partially a result of food services, particularly in North America, Britain, Ireland and Australia, being closed or at vastly reduced capacity during much of that period.
A cost-cutting plan instigated before the pandemic generated £4.7 million of savings in the first half. More savings are to come with the closure of a plant in Bellshill, North Lanarkshire, which were completed at the end of June. In addition, Devro generated cash in the first half while reducing its net debt.
Given that performance, the management team remains confident about prospects for the remainder of 2020 and anticipate that its mature markets typically should grow by up to 2 per cent annually, while the forecast in emerging markets is for between 6 per cent and 10 per cent growth.
The shares have been up and down, starting the year at 174p. As markets tumbled in March they went as low as 126p, before rebounding to almost 180p in June. By mid-July they were back at 132p, but the interim results gave them some momentum and they rose 6½p, or 3.7 per cent, to 184½p yesterday.
ADVICE Hold
WHY Devro has proved resilient during the virus and should pay a steady dividend
