With shares in BT Group (LSE: BT.A) currently languishing at little more than half their value of two years ago, shareholders in the telecoms group are probably feeling pretty glum.
Succession of setbacks
Its share price has been stuck in a prolonged rut ever since accounting irregularities at its Italian business first came to light in the summer of 2016. BT swiftly faced mounting clean-up costs as it later became apparent that the accounting scandal was much worse than it had originally thought.
This was the first of a succession of setbacks to hit the company, and before long, BT also reported a slowdown in demand for its pay-TV services and warned on profits following a collapse in orders in its public sector business.
Underlying the uncertainty over BT’s outlook for growth, the group scaled back its dividend growth ambitions. It has scrapped its previous target of increasing the payout by 10% or more for 2018, instead promising to retain a ‘progressive’ dividend policy.
Convergence
But despite all this, there are reasons to be bullish on the company as well. BT is undergoing a major transformation which will see the company bring together its consumer division with EE’s wireless network to drive converged products and to create a seamless network for customers.
I expect convergence, where one service provider offers multi-play services, will continue to provide opportunities for growth in the long run. It’s also likely that convergence will give an integrated incumbent a strategic advantage over its competitors, through better cost saving opportunities and upselling potential.
It’s also worth noting that earlier fears over the soaring costs of broadcast rights to English Premier League football matches may have been overdone. The total money spent on the rights to broadcast matches in the UK for the next three years is set to fall for the first time in more than a decade, in stark contrast to earlier estimates of as much as 40%.
Uncertainty remains
Still, there’s still a great deal of uncertainty to consider as well. The company is set to face tougher competition going forward as rivals such as Hyperoptic have stepped up capital investments in full-fibre broadband.
Regulator Ofcom is supportive, having recently published new proposals to allow rivals to install fibre on BT’s telegraph poles and in its underground tunnels. On the upside, however, building networks is an expensive business, while BT still has the advantages of scale on its side.
Then there’s the sustainability of its dividends to worry about. The pension deficit and weakness in free cash flows are major concerns, all at a time when capital investments are increasing. These risks will likely continue to overhang its shares, dampening the prospect of a major breakout in its share price any time soon.
Low valuations
Nevertheless, its low valuation is a big reason to still be interested. With shares in BT currently trading at a forward P/E of just 8.8, there’s significant upside potential in the longer term should the company successfully deliver on its turnaround strategy.
It’s probably because of this that City analysts are becoming more sanguine on its shares. Out of the 23 analyst recommendations, eight are strong buys, up from five just three months ago.