A lacklustre batch of second-quarter earnings results sent shares in BT skidding to four-year lows yesterday. Could this be a nadir for the group’s share price which offers contrarian investors a good opportunity to buy?
There are modest grounds for optimism. BT’s core UK consumer business continues to chug along well enough, with growth in broadband connections and cross-selling between TV, phone and internet services helping to boost average revenue per customer.
EE, the newly acquired mobile business, also appears to be on something of a roll, with earnings before interest, tax, depreciation and amortisation climbing 16 per cent to £326 million during the period.
Nonetheless, for all of BT’s many strengths as the historic 800lb gorilla of the UK telecom market, its embattled chief executive, Gavin Patterson, still faces a poisonous cocktail of problems.
Put together, they make buying shares in BT, which fell 2.6 per cent yesterday to 253.5p and have dropped 30 per cent over the past 12 months, an unappetising prospect for investors, except those with the very strongest of stomachs.
BT’s problems lie not in its consumer division but elsewhere, such as at Openreach — its wholesale broadband unit which is being hived off into a standalone business following a lengthy regulatory tussle with Ofcom — and Global Services, the company’s murky international arm at the centre of a massive fraud at BT Italia earlier this year.
That scandal had gone undiscovered for up to a decade and wiped billions off BT’s valuation overnight, leaving shareholders understandably furious.
Although BT claims good progress on both counts, many questions linger, while the tendency to incur the wrath of regulators poses a significant risk which investors in simpler and less complex companies would avoid.
Shareholders are also starting to fret over the sustainability of BT’s chunky dividend following a subtle shift in language yesterday, and rising political pressure on the company to invest billions in a new high-speed fibre optic network for UK broadband. This is viewed by many as a national priority to ensure the competitiveness of the digital economy after Brexit.
At 6 per cent, BT shares are yielding well above the 3.9 per cent average for members of the FTSE 100 index, raising questions about affordability unless the company’s financial performance improves.
BT is committed to shelling out nearly £4.7 billion to shareholders over the next three financial years, absorbing the bulk of its free cashflow and an unwelcome burden.
Yesterday Mr Patterson was at pains to stress that BT is determined to maintain its longstanding “progressive policy” of either maintaining or increasing the dividend. But the company also stated that its “first priority for the allocation of free cash flow after investment is value-enhancing re-investment” — an apparent shift in emphasis.
Squaring this circle of dividends versus investment would be difficult enough for Mr Patterson without throwing in BT’s gigantic pension deficit of £7.7 billion.
Simon Lowth, chief financial officer, may have qualified for understatement of the month yesterday when he admitted that there is unlikely to “be an overnight fix” for BT’s woes. Nobody could argue with that.
Mr Lowth, Mr Patterson and Jan du Plessis — who took up his new job as BT’s chairman this week — certainly have their work cut out sorting out the mess. Don’t hold your breath.
ADVICE Sell
WHY The shares may be at a four-year low but BT’s problems are not going away
Tate & Lyle
Tate & Lyle is one of those unfortunate cases for UK investors where future performance will have much to do with the actions of President Trump and must by definition be unpredictable. The main factor is the renegotiation of the North American Free Trade Agreement (Nafta) between the US, Canada and Mexico.
Tate & Lyle depends on the cross-border trade with Mexico, which buys its corn-based sweeteners to go into soft drinks there. This is largely behind a fall in the shares from £8 at the time of the election.
It is a pity because the uncertainty comes as Tate & Lyle seems to be functioning well on all fronts. The halfway figures saw analysts moving forecasts ahead for the current year. A 2 per cent rise in the halfway dividend is a gesture that the 4.3 per cent yield on the shares is safe enough.
The decision to ditch the historic sugar operations in 2010 and focus on developing higher margin speciality ingredients, backed by the solid income from the bulk ingredients side that supplies the sweeteners to those drinks producers, is well enough developed.
A key measure is the rise in sales of new products developed within the specialist side, and at the halfway stage the 14 per cent growth is in line with board expectations. Speciality ingredients is weathering well the pressure on big clients in North America that make traditional brands, which account for about 40 per cent of business there, as their customers switch to more niche products.
The closure of a Far East plant and concentration on producing solely from Alabama is benefiting Tate & Lyle’s sucralose business, the artificial sweetener that took so long to get to market, with profits up 5 per cent.
Bulk ingredients is benefiting from a good balance between demand and the cost of raw materials, with a 2 per cent growth in volumes. Take out swings between commodity gains this time and losses last time, and profits are up by 16 per cent.
Tate & Lyle shares gained 11p to 675½p and sell on about 14 times this year’s earnings. Nafta negotiations remain a key factor in progress from now, but on an optimistic view of these, that dividend yield should encourage investors to hang on and may tempt speculative buyers.
ADVICE Buy
WHY Favourable Nafta talks would boost shares