Valuecruncher’s mid-point estimate of BT Group is £3.06 with a value range between £2.49 and £3.65. The current share price of £3.11 is 1.60% higher than our mid-point estimate.
BT Group has been undergoing considerable changes in its business strategy since 2001. It has since seen poor revenue growth that has only recently picked up. Revenue growth has been improving since 2003, rising from a low of -1.11% in the 03/04 period to a high of 5.89% in the 05/06 period. From looking at the first half results of FY07 it is likely that revenues will rise to around £21 billion, corresponding to a 7% growth in revenues. Much of this rapid growth is attributed to the company’s “new wave” services, which include revenues from ICT, broadband and mobile products. It is unlikely that this magnitude of growth will be sustainable in the long-term so we have forecasted revenue growth at 7%, 5% and 3% for the 06/07, 07/08, and 08/09 periods, respectively.
BT’s EBIT margins have ranged between 13-15% in the past four years (13.50% in 2006). These margins are much lower than the margins experienced by BT’s competitors such as Telstra, which have EBIT margins in the range of 23-30%. The company’s “new wave” services are also likely to increase the EBIT margins experienced by BT. We have forecasted margins to increase to be 14% in 2007, 15% in 2008 and 16% in 2009.
Terminal growth is assumed to be 3%.
Discount Rate (WACC)
The discount rate applied is 11.5% (the discount rate that was used in a 2006 regulatory financial report).