I’m working my way through the latest annual reports of your favourite FTSE 100 companies, looking for insights into their businesses. Today, it’s the turn of BT Group (LSE: BT-A) (NYSE: BT.US).
Revenue
BT reported a 5% fall in revenue for 2013. I can tell you that, in fact, this is the fourth consecutive year of top line contraction. I like it that management is totally upfront about the revenue problem:
“We operate in markets which are characterised by: high levels of change; strong competition; declining prices; technology substitution; market and service convergence; customer churn; declining revenues; new competitors; and regulatory intervention to promote competition and reduce wholesale prices.”
That may sound grim, but BT is now aggressively pursuing revenue growth, most conspicuously with its bold entry into the TV sport market. Indeed, so much so that in recent weeks analysts have reversed their forecasts of another year of revenue decline.
Margins
Despite the recent history of falling revenues, I was encouraged to learn that BT’s efforts on cost control are continuing to bear fruit. From a few quick calculations using segmental revenue and EBITDA (earnings before interest, tax, depreciation and amortisation), I was able to discover that margins have been improving right across the business — as the tables below show.
| 2013 | Global Services | Retail | Wholesale | Openreach |
|---|---|---|---|---|
| Revenue (£bn) | 7.17 | 7.23 | 3.59 | 5.07 |
| EBITDA (£bn) | 0.63 | 1.94 | 1.17 | 2.31 |
| EBITDA margin | 9% | 27% | 33% | 46% |
| 2012 | Global Services | Retail | Wholesale | Openreach |
|---|---|---|---|---|
| Revenue (£bn) | 7.81 | 7.39 | 3.92 | 5.14 |
| EBITDA (£bn) | 0.63 | 1.83 | 1.21 | 2.30 |
| EBITDA margin | 8% | 25% | 31% | 45% |
| 2011 | Global Services | Retail | Wholesale | Openreach |
|---|---|---|---|---|
| Revenue (£bn) | 8.06 | 7.70 | 4.20 | 4.93 |
| EBITDA (£bn) | 0.59 | 1.78 | 1.32 | 2.13 |
| EBITDA margin | 7% | 23% | 31% | 43% |
Debt
BT reported an impressive £1.3bn fall in net debt for the year. You may recall that during the dark days of the financial crisis BT’s debt was actually bigger than its market capitalisation. I went back through the numbers, and the table below shows the overall positive trend since 2009.
| 2009 | 2010 | 2011 | 2012 | 2013 | |
|---|---|---|---|---|---|
| Net debt (£bn) | 10.4 | 9.3 | 8.8 | 9.1 | 7.8 |
I was pleased to read BT’s statement that: “We intend to continue our policy of reducing net debt”.
Overall, the things I’ve learned from BT’s annual report are positive; and support my view that the company is reasonable value on a below-market-average 14.7 times forecast earnings at a recent share price of 377p.