BT Group Better Positioned Than Proximus
Summary
- Telcos are raising prices to combat inflation.
- This is occurring despite fundamental competitiveness of the industry and general pricing pressure.
- While both BT Group and Proximus are raising prices, BT Group is more dominant in its markets where Proximus operates more in oligopoly.
- Price increases for BT Group are more pronounced, and therefore it is the better pick given a lower multiple.
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Published on the Value Lab 1/5/22
BT Group (OTCPK:BTGOF) is another telco exposure that investors might be considering as they take more defensive positions anticipating recession. The issues in telco are competition mounting as new entrants offer more efficient plans, as well as large CAPEX burdens as incumbent telco companies need to drive fiber rollouts. While some are further ahead than others, both Proximus (OTCPK:BGAOF) and BT Group are still in rather early stages of the fiber rollout, and therefore deserve consideration together. Overall, the dividend is better covered for BT Group, they trade cheaper, and they've had more room for price increases. It stands to reason that they're the better pick.
Yields
Dividends are of course another reason why telco stocks appear on many investor radars. The dividend for Proximus is not sustainable as mentioned in our last article, the debt is rising to keep it going and not fundamentals.
Proximus Debt (Q4 2021 Pres)
BT Group on the other hand has a bit of a better situation, but not by much. Based on the 7.7p dividend that they are targeting for the full year, and annualising FCF, we are looking at a small 40 million GBP shortfall in FCF to cover the dividend, putting the FCF payout ratio slightly above 100%. At least this accounts for the major CAPEXing that the company is doing both for its fiber rollout and for 5G. The yield for BT Group is 4.3% on an ongoing basis, while it's 5.1% for Proximus. The BT Group dividend is by far more sustainable, where the Proximus payout ratio on FCF nears 200%.
Price Increases
Competition is a major factor for telco companies, with plenty of upstarts providing more efficient plans albeit with less infrastructure and less profitably. BT Group has had idiosyncratic problems as well as Proximus, with legal issues proceeding around whether there are uncompetitive practices being carried out in their UK market. Proximus is also facing issues in its two main Belgian markets with authorities calling for new entrants to faze the incumbent companies. Between the two of them, it appears BT Group has more potential to flex pricing power, as they have proven in response to recent inflation. This is also because Proximus already operates in a more competitive oligopolistic market, and certainly government scrutiny is higher in Belgium than it appears to be in the UK. Proximus is raising prices by lower amounts on most plans, and is being forced to offer discounts on some entry level plans. BT Group is raising prices by more in GBP for most plans (about 1 EUR equivalent more across the board), without having to make concessions except for not raising prices on some entry-level plans and others marketed towards more vulnerable groups. The price increases for BT will be ahead of inflation by about 4%.
Multiples
BT Group has a slightly lower but still ample yield that is actually sustainable, and it also has more pricing power as evidenced by recent price increases. Both Proximus and BT Group are seeing slightly negative growth on pricing and wholesale issues, with Proximus having a slight topline advantage thanks to TeleSign. Their multiples should be similar, but with BT justified in trading at a slight premium. However, Proximus trades slightly higher.
Multiple Spread, VTS
What has been considered in this multiple? EV has been adjusted for both to consider the fiber rollout that they still have to conduct, marked as an inevitable extraordinary CAPEX burden. The BT EV also reflects meaningful pension deficits. With all the adjustments, BT trades at a slight discount that can't be well explained.
Conclusions
Telcos are attractive as rates rise and eat into disposable income. Essentials are a good place to park money, and telcos do provide essential services. The downside is that competition in these markets is stiff. Moreover, the government often gets involved, and heavily regulates these industries such as with anti-trust monitoring, sometimes requiring the taking on of bad debts in weak economic environments, and requiring other uneconomical things of these companies in the name of public interest. Nonetheless, the yields are high and markets attractive at this point in time, but between Proximus and BT, both with still a way to go in the fiber rollout, BT Group appears more attractive.
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This article was written by
Formerly Bocconi's Valkyrie Trading Society, seeks to provide a consistent and honest voice through this blog and our Marketplace Service, the Value Lab, with a focus on high conviction and obscure developed market ideas.
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