The following report is based on information provided in the BT group financial reports 2016/2017. It also contains other information made available by the company as well as industry knowledge. References will be made throughout the report to the ratios provided in the appendix.
As the British Telecom group (BT group for the purposes of this report) was founded in 1846, it makes it one of the oldest telecommunications groups in the world. However it was not on the public market until 1980, as it was owned by the British government. By 1984 the government had sold 51% of its shares in an effort to privatise the company. The British government continued to sell their shares until 1993 when they sold out their remaining holding in the company. With these changes in ownership came a new name; BT, which the company still trades under to date. Today BT serve customers in the UK and Ireland as well as 180 countries worldwide with 30 million customers worldwide. BT group provide homes and businesses with fixed-line services, broadband, mobile and TV services alongside networked IT services.
2017 was a particularly challenging year for BT Group as they have faced some obstacles in the UK public sector and also from the scandal of their Italian business. However securing the rights to top-flight European football until 2021 sets them to a particular advantage in the industry. Despite the previously stated setbacks, BT Group are on course and in keeping with their competitors, and for the purpose of this report compared and contrasted to Sky PLC.
At £2.93 on the 2 September 2017 its share price has declined significantly from 5 September 2016 where the share price was £3.92. This decline may be due to a lack of confidence in the company after the scandal of their Italian business.
The Following are some of the key observations made and conclusions drawn in the main body of this report:
BT Group's net profit margin has increased from 17.74% in 2016 to 18.7% in 2017
A decrease has been noted in the firm's gross profit ratios from 20.2% in 2016 to 17.17% in 2016.
The acquisition of EE contributed £1.6bn net present value of revenue synergies to the companies financials, and also directly gave rise to sales of 35%.
BT Group is a highly geared company
The UK's decision to leave the EU has directly impacted BT group as they have lost out on cross currency swaps & foreign currency exchanges.
The telecommunications industry requires a high level of debt funding as a result of their continual investment in growth and development.
BT Group's ROCE has marginally decreased from 11.53% in 2016 to 10.07% in 2017,meaning BT had greater amount of revenue to reinvest.
2017 was a challenging year for BT as a whole as, BT Italy was the subject to a large fine
“The central objective of financial analysis is to eliminate the concealment of accrual accounting and reach the underlying cash flows” (Subramanyam and Wild, 2009). BT Group plc, one of the world's leading communication services companies will be financially analysed under three distinguishing headings, activity and liquidity, financing and profitability and return on investment. Comparative assessment techniques with the aid of ratio interpretation will be utilized in order to facilitate evaluation of BT Group plc alongside rival Sky plc and the telecommunications industry.
Activity and Liquidity
BT Group plc improved their cash cycle to (-45.89) days in 2017, as opposed to (-65.85) days in 2016. Creditors days decreased from 105 days to 76.95 days. Stock days dropped from 4.58 days to 4.15 days and debtor's days also lessened from 34.6 days to 26.91 days. These numerical de-escalations can be directly accredited to the involvement with acquisitions, joint ventures and mergers of BT Group plc. In concordance with its global services strategic approach and their necessitation to become a fully converged services provider, BT Group plc, acquired British originated mobile service and internet provider EE in 2016 for £12.5bn and IP Trade SA in 2017. The monumental EE acquisition contributed £1.6bn net present value of revenue synergies to the entities financials, and also directly gave rise to an amplification in sales of 35%. However, in light of the recently discovery by BT group plc's functional department, Openreach, with regards to modernized and reformed access options, using fast and single order generic ethernet access, the effects of the EE acquisition will not yet be fully incorporated and results realized. This new methodology of introducing ultrafast network speeds into 12 million homes will not be achieved until nearer 2020. As BT engage in an investment for growth strategy and choose to continually invest in projects and ventures before reaping the results, it takes some time before their financial statements fully reflect the successes of such endeavours. A direct comparison can be made between BT Group plc and their competitors Sky plc for example, who maintain a negative cash cycle of (-3.57) and a greater cash generation ratio of 2.18 (as opposed to BT'S of 1.94). This is primarily attributable to the fact that Sky upholds a growth strategy, whereby they use methods of continual improvement to expand and develop what they already have, in contrast to BT who prefer to invest and hold first mover advantage in terms of putting resources into new creativities in riskier, more diverse, markets.
The quick ratio/acid test ratio is an efficient measurement of BT Group plc's short-term liquidity, ie the ability/inability to convert assets into cash excluding inventories which comprise of network maintenance equipment. Although this is a relatively prudent concept, ensuring stock which is not saleable/profitable is not accounted for, BT Group plc still has a quick ratio of 0.609 (2016: 0.717). The outcome of this ratio usually would signify a cause for concern, however as BT group plc is a reputable firm who mainly operate on a long-term contract revenue basis with their customers, they have little trepidation when it comes to ensuring short term financing and meeting payment obligations. In contrast, Sky plc exhibits a slightly more favourable quick ratio of 0.76, which mainly can be accredited to a closer supervision of accounts payable. This is highlighted by 57% of current liabilities relating to accounts payable on BT Group plc's balance sheet, as opposed to 37% of Sky plc's.
The manner by which an entity funds its activities, ultimately decides the longevity of the company and impacts upon the structures and strategies of said entity. Firms in similar industries tend to have similar capital structures and so there is no outlined best way by which a business should be financed. A ratio of 2.77% for the 2017 period (2016: 2.096) indicates that BT Group plc is a highly geared telecommunications firm. This leaves an avenue constraint for future debt funds to be raised. In the prior year 2016, £2107m of net debt was directly attributable to the acquisition of EE. Main competitors, Sky plc have a debt to equity ratio of 2.355, reinforcing the idea that the telecommunications industry requires a high level of debt funding as a result of their continual investment in growth and development. Such capital-intensive industries, require huge funding before services can be provided and cash generated and pumped back into the firm. For companies like such, where profits come last, it can be more cost efficient to engage in debt financing as huge tax incentives may apply whereby tax will only be owed on interest as opposed to on operating profits. With property plant and equipment of £16,498m which could be easily liquidated in the event of insolvency, BT Group plc have little concern with regards to the devaluation of their entity.
The interest coverage ratio for BT Group plc for the year 2017 was 3.87, down from 4.82 in 2016. This determines that there is a reduction in BT Group plc's ability to meet loan interest payments with regards to current firm profitability. This can mainly be accredited to the unexpected costs to the firm, resulting in a reduction in earnings. In the past year, after an Ofcom enquiry into the outdated use of ‘deemed consent' by Openreach, BT Group plc were subjected to a £42m fine and £300m compensation payments. Further disbursements of £15m enquiry costs into a BT Group Italian business, increased difficulty in meeting repayments. Whilst BT Group plc have not yet reached default risk level, a decreasing ratio could act as an indication that precautionary measures should be implemented and taken to ensure no unexpected costs arise in the future.
Profitability & Return on Investment
The analysation of profitability ratios is of huge significance to a firm as the majority of investments are undertaken with a view to both earnings and capital appreciation. Whether or not a firm has the ability to generate turnover directly impacts upon all stakeholders of an entity and subsequently leads to the satisfaction/dissatisfaction of their requirements leading to a harmonious corporate environment or in some cases company conflict. There has been an instability in the Sterling against other foreign currencies, a 10% weakening in fact, which thus in turn has resulted in a significant influence over the profitability of BT Group plc. The volatility of the GBP can mainly be attributed to the UK referendum to leave the EU in 2016 and as a result of this, BT Group plc have lost out on £1419m in 2017 on cross currency swaps and foreign currency exchanges. BT Group's exposures mostly arise on non UK subsidiary investments such as the acquisition of Belgian company, IP Trade SA during 2017.
There have been significant increases in revenues (£19,012m in 2016 in comparison to £24,062m in 2017, and net profit margins have up surged too. BT Group plc's net profit margin has increased somewhat from 17.74% in 2016 to 18.7% in 2017 giving an indication that the firm is paying and managing its cost outlays efficiently. Competitors Sky plc had a 5.35% net profit margin in 2017, strongly suggesting a better implementation of management and a strong controls system in place in BT Group plc. However, there has been an unfavourable decrease noted in the firm's gross profit ratios. Decreases from 20.2% in 2016 to 17.17% in 2017 give the suggestion that margins are reducing due to there being a more equally proportioned market spread between service providers in the telecommunications industry, with smaller firms being able offer competitive products and services.
An alternative method of analysing the profitability of BT Group plc is to use the ROCE (return on capital employed) ratio which has huge significance to individuals whom have funded the firm, through either debt or equity. BT Group plc's ROCE has marginally decreased from 11.53% in 2016 to 10.07% in 2017, regrettably meaning BT used its capital more constructively and subsequently had greater amount of revenue to reinvest into the entity for its beneficiaries in 2016. This is not an ideal scenario as it denotes that undertaken acquisitions are not yet reaping huge revenues. In contrast to this, Sky plc have a ROCE of 7.48% in 2017 (2.59% lower than BT Group plc), implying that Sky plc's use of growth strategy is of weaker and of less ability to generate revenues than that of BT Group plc's investment strategic approach to business.
BT Group (2017). BT Group plc Annual Report & Form 20-F 2017. [online] Btplc.com. Available at: https://www.btplc.com/Sharesandperformance/Financialreportingandnews/Annualreportandreview/pdf/2017_BT_Annual_Report.pdf [Accessed 21 Oct. 2018].
Subramanyam, K. and Wild, J. (2009). Financial statement analysis. 10th ed. Boston : McGraw-Hill Irwin.
Organisations main goal is to maximise shareholder wealth and BT Group plc aims to apply this goal in its day to day running of the business. As at closing of the stock exchange on the 13th of November 2018, BT Group plc share price was £252.30 per share. This is a minor increase from £244.50 per share on November 2017, a 3.19% share appreciation. Their share price had been very unstable and on the 7th of June 2018 it hit an all-time low of £202.95. Their P/E ratio decreased from 13.85 in 2016 to 11.01 in 2017. In comparison to Sky their P/E ratio for 2017 was 16.19 which is slightly higher than BT Group plc.
Their return on capital employed (ROCE) was 10.07% in 2017, in comparison to 11.53 % in 2016. This is a slight decrease when compared to Sky who had a ROCE OF 7.48 %.
Corporate Governance ‘is a system by which corporations are governed and controlled with a view to increasing shareholder value and meeting the expectations of other stakeholders. (Iwu – Egwuonwu, 2011). BT Group plc is the listed holding company for the BT group of companies. It has shares listed on the London Stock Exchange and New York Stock Exchange. It is dedicated to acting dutifully and sustaining high standards of morals and reliability in all dealings with its stakeholders. Directors believe that it has abided by the requirements of the UK Corporate Governance Code. The Board consists of 11 directors which is made up of the chairman, the chief executive, group finance director, 7 independent non-executive directors, one non- independent non- executive director and is backed by the company secretary. This board has a wide range of knowledge in sales, marketing, technology, operations, finance, accounting, risk, corporate social responsibility and so on. It has 27% female to 73% male representation which illustrates just how the diverse the board is. Most of the Board is independent, and the role of the chairman and chief executive are separate.
The board is made up of 10 committees who are responsible for various roles in the company. Examples of such committees include the Remuneration Committee, BT Pensions Committee, Committee for Sustainable and Responsible Business and the Technology Committee. Additionally the Audit and Risk committee oversee financial, non-financial, internal and external audit. The Nominating and Governance Committee ensure that BT follow governance in the correct manner. Operational issues and other problems are dealt with the operational committee and recently the Conflicted Matters Committee was founded to analyse Board papers and agenda items that could cause conflict. The Integration Committee plays a major role in the assimilation of EE and BT. Lastly, the Investigatory Powers Governance Committee is accountable for the use of investigatory powers. The chairman Sir Michael Rake stepped down after 10 years in service and Jan Du Plessis has taken over as chairman in November 2017. Simon Lowth also joined the board as group finance director replacing Tony Chanmugam. This exemplifies a constant pledge to modify the board in a continually evolving commercial world. According to the Annual Report (2017) the board met 12 times in the year where various discussions such as the appointment of a new chairman, BT Italy, BT Sport, Digital Communications Review and Deemed Consent were discussed. (BT PLC, 2017).
This year was an extremely challenging year for BT Group plc when BT Italy was the subject to a huge fine. A new CEO and CFO has been appointed in Italy and an investigation has taken place. Improper accounting practices and actions led to an exaggeration of earnings and assets. Furthermore, on March 26, 2017 findings about the use of Deemed Consent by Openreach were published. It was found that Openreach infringed its obligations by applying Deemed Consent to cut compensation payments to its communication providers between January 2013 and December 2014. Openreach decided to compensate its communication providers and a fine of £42 million has been enforced. Controls have been put in place to ensure this never happens again.
A Board evaluation was carried out by the chairman and company secretary in 2016 by an electronic questionnaire. The general result was encouraging. Directors believed that the board worked very well together and participated significantly when it came to the EE deal. They continually concentrated on clientele and used up a substantial amount of time on the Digital Communications Review.
Corporate Social Responsibility plays a huge role in organisations today. It can be defined as ‘a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders'. (Financial Times, 2018). Companies are not placing as much emphasis on creating shareholder wealth as they did in the past. They now place more importance on the wider community of stakeholders such as interest groups, employees and so on. BT have taken various steps to ensure that they can achieve a sustainable business environment.
Environment- BT Group plc believes that in order to tackle climate change, Information and Communications Technology (ICT) is key. They are constantly participating in UN negotiations where they share their invaluable information. By investing in ICT this can reduce carbon emissions. Their goal for 2020 is to cut down their carbon emissions by at least 3 times the end to end carbon impact of our business. (BT Group plc, 2017). They continuously report all greenhouse gas emissions as outlined by UK regulations. Furthermore, last year they reported the early achievement of their science – based climate stabilisation intensity target (ISI) (BT Group plc, 2017). As a result, they are presently investigating a new objective that incorporates EE which hasn't been disclosed. Finally, in regard to waste BT have launched schemes where they have accomplished their UK goal to dispose zero ready waste straight to landfill.
Marketplace- BT Group plc pride itself on providing the best services to its consumers and is the UKs principal mobile network, fixed broadband and TV operator. They have hired 1,500 additional staff in their Openreach company to attempt to reduce the number of missed clientele consultations, what's more, they have hired 5,000 staff at their contact centres. BT Group plcs goal is to ensure that all their customers have a positive and impressive experience continually.
Workplace- BT Group plc was awarded in The Times, top 50 employers for women awards 2017. 25% of their workforce are women and it is something they place great pride on. They are the founding member of the Equality and Human Rights Commission working forward initiative and as a result their maternity guidebook is being used as a basis of most excellent practice. They are a ‘disability confident' employer and are very passionate to have disabled people part of their workforce. They are working hard to eradicate preventable health and safety accidents by providing upgraded coaching and materials necessary and as a result have reduced their rate of incidents by 18%. BT Group plc run recruitment campaigns for graduates and apprentices with the intention to entice more women and people from ethnic backgrounds. They have also introduced ‘unconscious bias training' for employees in recruitment. (BT Group plc, 2017).
Community- BT Group plc is actively involved in volunteering and their employees can utilise up to 3 days a year to volunteer. Currently in the last year 31% of employees accomplished 39,000 days of volunteering. 2,000 employees aided children and teenagers. It is their 2020 ambition to achieve that two thirds of their workforce volunteer for some organisation. In conclusion, 11,000 employees participated in Stand up to Cancer and Comic relief events.
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