BT Group: We Like BT’s Short- and Medium-Term Prospects; Shares Undervalued

We liked BT Group's first-quarter trading update, with both revenue and EBITDA growing nicely at 4% and 5%, respectively. We are pleased with how BT has been performing recently and also with its medium-term outlook. First, BT is passing price increases to U.K. customers in the consumer division (an industrywide action that Vodafone and Virgin Media O2 have also followed) with limited churn effects in both mobile and broadband, which is resulting in healthy revenue and EBITDA growth. Second, Openreach keeps performing very strongly, rapidly deploying fiber-to-the-home across the country (covers 44% of the U.K. at the end of this quarter) and bringing in more wholesale customers (orders up 34% year over year). Openreach wholesale contracts with its customers are linked to CPI, offering a very good hedge against inflation. On top of this, Openreach shares part of the average revenue per user service providers charge to its customers, which we see as “free” revenue that flows directly to Openreach’s bottom line. Openreach recorded 8% and 12% growth in revenue and EBITDA this quarter, respectively, with EBITDA margins expanding 130 basis points from last quarter. Last, BT announced three months ago its intention to reduce its global headcount from 130,000 employees currently to around 75,000-90,000 in 2028-30—something we like as telecommunication companies need to keep their cost bases streamlined due to their general struggles to increase the top line. We are maintaining our GBX 200 fair value estimate and see the shares as significantly undervalued, trading in GBX 120 territory.