THERE are FTSE 100 shares that have performed worse than BT over the past three years. But not many. And since BT has produced results over that time that have been perfectly solid, some shareholders might feel a little peeved that the market has chosen to deal harshly with the telco.
Publication of third-quarter results yesterday saw more of the same dispiriting reaction. No one can suggest that BT is a stellar performer — it has a very tricky hand to play, given the way its industry is changing — but the numbers were solid and came in ahead of expectations. Yet BT shares, on a day when the FTSE 100 was buoyant, were among the few fallers.
It is, of course, BT’s prospects that are causing the concern. Bereft of a significant weapon in mobile telephony, the voice business looks exposed to competition. There is a big opportunity in the provision of broadband connections — more or less required for anyone using the internet — but competitors are chopping away at the incumbent’s position. As BT’s stranglehold on the last mile of wire between telephone exchange and home user is loosened, the competitive threat can only get more worrying.
BT has created a decent business for itself in IT services, but there is a suspicion that there is too much of the leviathan about it to deliver sustainable long-term growth from these activities. The 5 per cent-plus dividend yield supported the share price. But the payment is only thinly covered by earnings. The dividend yield — nearly twice the average for the FTSE 100 — may suggest deep market nervousness more than BT’s corporate generosity.
Dark clouds, therefore, surround BT. But patches of blue sky can be seen. The first comes in WiMax, the mobile internet infrastructure that may become the standard for laptop users in remarkably short order. WiMax licences are rare and BT does not have one. But Pipex does and it might sell.
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More intriguingly still, BT is soon to get increased freedom over the prices it can charge retail and wholesale customers. It is the quid pro quo given by Ofcom in exchange for obliging BT to open itself to competition on local loop services. It is unclear quite how this might benefit BT. The company is also playing down the potential. But it could give BT significantly greater leverage.
The odds are still stacked against BT shares. But having come so far, continued loyalty may now be in shareholders’ best interests. Hold.
ICI
IT IS almost a decade since ICI, the Dulux paint maker, paid Unilever $8 billion for National Starch and Chemical, Quest International, Uniqema and Crosfield. A key component of the acquisition was John McAdam, a one-time Uniqema chairman who made the transition to ICI’s senior management ranks. Yesterday, Dr McAdam, now chief executive of ICI and halfway through a four-year programme to resurrect the company’s fortunes, signalled the end of an era with the imminent sale of Uniqema.
Uniqema is an oddity among ICI’s stable of speciality products. Primarily a producer of fatty acids that are used in detergents and healthcare products, Uniqema also produces glycerine as a byproduct. Last year it had sales of £560 million for a £22 million trading profit, or 4 per cent of ICI’s group trading profit.
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Dr McAdam said that Uniqema required more investment to deliver the growth performance required of the new and improving ICI. That investment, he said, was more likely to come under new ownership.
UBS and Morgan Stanley, the investment banks, are conducting the division’s sale. Analysts estimate a price tag of anywhere up to £470 million, depending on how much debt ICI offloads with Uniqema.
Dr McAdam was quick to point out, however, that the achievement of his ambitious recovery programme was not contingent on Uniqema’s sale. ICI’s adjusted pre-tax profit for the year to December 31 was £444 million, up 5 per cent. Despite struggles to offset oil-related cost pressures, ICI remains on track to achieve strategic goals including above-GDP sales growth, 2 per cent trading margin improvement, 4 per cent improvement in return on capital employed and sustainable positive cashflow by 2007.
ICI needs more than a glossy paint job to resemble the iconic British group that it once was. But Dr McAdam is steering the company in the right direction. ICI’s shares trade on a 11.6 times forecast multiple and offer a 2.4 per cent prospective yield, attractive enough to offset the obvious challenges. Hold.
Smith & Nephew
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BRITAIN’S population is getting older and in theory that should bring bumper demand for artificial hips and knees. But despite delivering solid full-year results yesterday Smith & Nephew, the medical devices maker, said growth would slow in 2006.
The cautious outlook triggered nervousness in the market. But S&N was quick to try to reassure. The group is developing innovative new products which should help to drive sales and is increasing its market share. Meanwhile, plans to split its biggest division, orthopaedics, into two parts — one focusing on trauma (fixing broken bones) and one focusing on reconstruction (mainly hip and knee replacements) — is to be welcomed because it should improve its customer service.
Sir Chris O’Donnell, chief executive, is hoping to lead a $1 billion acquisition charge after promoting David Illingworth, head of orthopaedics, to the new role of chief operating officer.
As a company S&N is doing well. There is a risk that the share price has run ahead of itself, however. The 1 per cent dividend yield gives scant reward. Pass.