BT Group plc Profile

Rahul Ramakrishna
BT - Overview
Description Recent Events
Founded in 1846, the BT Group is the oldest and 03 Aug 2007: Announced the acquisition of the IT
largest telecom operator in the UK and Europe. infrastructure division of CS Communication and
Principle activities include networked IT services, Systmes, for 60m in cash.
global telecommunications services and broadband CS Communication and Systmes is a French
products and services. IT systems and network provider
Serves over 18m business and residential customers 07 Jun 2007: Completed the acquisition of i2i
in over 170 countries. Enterprise Ltd
Listed as a 100% free float on the LSE with a i2i is an Indian enterprise services company
market cap of 25.6bn. specialising in IP communications services for
major Indian and global MNCs.
19 Feb 2007: Appointed Sir Michael Rake as its next
Brief History chairman beginning September 2007.
Launch of British Telecom, through a Sir Michael Rake is the current chairman of
1981 separation from the parent company, the Post KPMG
Office
He is also the chairman of business in the
community and is on the board of the Prince of
1984 Listed 50.2% to the public and its employees
Wales International Business Leaders forum.
Sale of shares by the Govt; the govt retained 20 Dec 2006: Signed a 5 year, 1bn outsourcing
1991 around 22% contract with Tech Mahindra.
Tech Mahindra is an Indian IT company
Appointment of the current chairman providing solutions and services to the
2001 Spinning off of O2
telecommunications industry
Source: Company data; Broker research
BT Overview
Group Summary
Global Services Retail Wholesale Openreach

Provides network services Operates the physical assets

Targets the top 10,000 Supplies a wide range of
and solutions within the UK, of the local access and
Description

global multi-site organisations communication products and

including ADSL, conveyance, backhaul networks providing
worldwide services, including voice, data,
transit and bulk delivery of products such as Wholesale
Provides global reach and a internet and multimedia
products Line Rental and Local Loop
complete range of networked services, to the consumer and
Serves over 700 Unbundled lines to around
IT solutions and services small business markets
communication companies 400 communication providers
bn)
Financials (bn

At Q1 FY08
At Q1 FY08 At Q1 FY08 At Q1 FY08
Revenue 1.31bn
Revenue 2.23bn Revenue 2.06bn Revenue 1.87bn
Margin 36.5%
Margin 11.2% Margin 10.3% Margin 25.9%

Global Services Global Services

Responsible for the design Responsible for the
and development of the deployment and operation of
platforms, systems and the services
processes

Source: Company data; Broker research

 BT - Key Personnel & Financials
Segment Revenue Spread Board of Directors
0.001%

Name Title
28% Major Corporate Sir Christopher Bland Chairman
35%
Business Ben Verwaayen CEO
Consumer
Wholesale/Global Carrier Hanif Lalani CFO
Other Andy Green CEO, Group Strat. & Op.
24% 12%
Francois Barrault CEO, BT Global Services

Paul Reynolds CEO, BT Wholesale

Summary Financials Ian Livingston CEO, BT Retail

Mar y/e 07E-10E
John Nelson Non Executive Director
(GBPm) FY07A FY08E FY09E FY10E FY11E CAGR
Revenue 20,223 20,663 20,942 20,812 20,695 0.1% Clayton Brendish Non Executive Director
% Growth 2.2% 1.3% (0.6)% (0.6)%
EBITDA 5,633 5,783 5,864 5,926 5,943 0.9% Margaret Jay Non Executive Director
% Margin 27.9% 28.0% 28.0% 28.5% 28.7%
Carl G. Symon Non Executive Director
Net Income 2,852 1,742 1,882 1,906 1,968 4.2%
% Margin 14.1% 8.4% 9.0% 9.2% 9.5% Matti Alahuhta Non Executive Director
Capex 3,247 3,270 3,114 2,903 2,725
% Margin 16.1% 15.8% 14.9% 13.9% 13.2% Phil Hodkinson Non Executive Director
FCF(1) 2,386 2,512 2,751 3,023 3,217 8.6% Deborah Lathen Non Executive Director
% Margin 11.8% 12.2% 13.1% 14.5% 15.5%
Source: Company data; Broker research
1 : FCF is defined as EBITDA - Capex
 BT Summary Valuation
LTM Share Price Performance Price / FY08E Earnings
400 Equity 4.3bn 250 15.0x
14.5x

Millions
14.2x
EV 31.9bn
Own share buy back 14.0x
350 Average 13.0x 13.2x
13.2x
Signed outsourcing 13.0x
Deal with Tech Mahindra 200 12.3x
300 12.0x

11.0x
11.0x
250
Share Price (GBPp)

150
10.0x

Volume
France Telecom BT Vodafone Deutsche Telefonica
200 Telecom Italia Telecom

100
EV / FY08E EBITDA
150 6.5x
6.5x 6.3x
6.2x
Average 6.0x
100 6.0x
5.8x
50 5.7x
5.5x
5.5x
50
31.9%
5.0x
0 0
16/Aug/06
16/Sep/06

16/Nov/06
16/Dec/06

16/Mar/07

16/May/07

16/Jul/07
16/Aug/07
16/Oct/06

16/Jan/07
16/Feb/07

16/Apr/07

16/Jun/07

4.5x
France Deutsche BT Telecom Vodafone Telefonica
Telecom Telecom Italia
Source: Company data; Broker research; Yahoo Finance for
share price data
 BT Broker Comments
Broker Target Price Range Broker Comments
2 2
We believe that BTs results were positive in some respects, but
2 disappointing in terms of cash flow generation. Revenue was 0.7%
better than consensus, while EBITDA was 2% ahead; A further positive
was the pension fund, which has swung into a GBP1.4bn surplus. BT
still has material headroom in terms of its ability to support a higher
yield or more debt. The major downside risk, in our opinion, is that ULL
1 competition undermines the consumer segment more rapidly than
1
anticipated. HSBC, 06 August 2007

0 BTs 1Q08 results were a mixed bag, with better revenues, in-line
EBITDA, and better EPS. The revenue beat was caused by better
<GBPp 300 GBPp 300-330 >GBPp 330
traditional revenues, but Global Services again showed no sign of
margin accretion. Tax and interest changes cause a slight upgrade in
Broker Target Prices (EUR) near-term EPS figures, but a 20bps downward change to our long-term
Figures in GBPp Issue Target Premium to Global Services margin forecasts causes a slight fall in our target to
345p. Morgan Stanley, 27 July 2007
Name Date Rating Price Price Curr. Issue

HSBC 06-Aug-07 Neutral 310 320 6.0% 3.2%

The mobileremain
Estimates business, which
static: accounts
Following thefor nearlyof94%
release of Mobistars
BT Group's 1Q08
JPM 24-Jul-07 Un"weight 313 285 (5.6)% (8.9)% top
results, we have made minor housekeeping changes to an
line, has been witnessing a decline in ARPU due to ourincrease
estimates.
in
Wecompetition
leave 2008E (to revenue
a small extent) and cut
unchanged, andin interconnection
although EBITDA rates
has(to
BS 31-Jul-07 O"weight 312 404 33.9% 29.5% aincreased
large extent). For the full year 2007, the company has reiterated
0.5% to 5,813m, our EPS estimate is unchanged at
its guidance of aOutperform
23.4p.Reiterate revenue decline
rating:ofBT
2-4%. Mobistar
currently estimates
trades on 13.3xthat
our
MS 27-Jul-07 Neutral 311 345 14.3% 10.9% the overall
2008 EPS negative
estimate,impact
comparedon mobile marketon
to the sector revenue due tothe 2008E
15.3x whilst
regulation
EV/Taxed will
Op beFCF 8%ofincluding interconnection
17.0x is ahead of the sector(5.0%) and roaming
on 14.0x. Our SOTP
UBS 02-Aug-07 Un"weight 311 295 (2.2)% (5.1)% cuts (3.0%). Further, the poor performance in 1H07
valuation of 404p continues to imply significant upside. has led us to
lower our revenue and margin estimates HSBC, 24 July
Bear Sterns, 31July 2007 2007
Source: Broker research Mean 9.3% 5.9%
 BT Bundled Telecom KPIs
Revenue & EBITDA (GBPb) Active Customers (000,000)
25.0 16.0
20.2 15.5
19.5
20.0 18.4 15.0
14.5
15.0
14.0

10.0 13.5

5.5 5.5 5.6 13.0

5
5.0 12.5
1.4 12.0
0.0
04/05 05/06 06/07 Q1 07/08
Revenue EBITDA

Consumer ARPU (/month) CPS Volumes (000,000)

25.0
21.6 21.8 22.2 7.0
20.9 21.4
20.0 6.5
32% 31% 32% 32% 32%
6.0
15.0 5.5
5.0
10.0
68% 69% 68% 68% 68% 4.5
5.0 4.0
3.5
0.0
3.0
Q1 06/07 Q2 06/07 Q3 06/07 Q4 06/07 Q1 07/08

Contracted Non-contracted
Source: Company data; Broker research
BT Bundled Telecom KPIs
Fixed Network Calls (minutes in billions) Exchange Lines(000,000)
60.0 30,000 4,300

50.0 25,000

4,100

40.0 20,000

30.0 15,000 3,900

20.0 10,000

3,700

10.0 5,000

0.0 0 3,500
Q1 FY07 Q2 FY07 Q3 FY07 Q4 FY07 Q1 FY08

Business Residential BT Openreach

Retail Freephone & FRIACO BT Retail

Source: Company data

BT Bundled Telecom KPIs
Retail Broadband (users in millions)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Q1 FY05 Q2 FY05 Q3 FY05 Q4 FY05 Q1 FY06 Q2 FY06 Q3 FY06 Q4 FY06 Q1 FY07 Q2 FY07 Q3 FY07 Q4 FY07 Q1 FY08
Business Residential

Wholesale Broadband (users in millions) Openreach Broadband (users in thousands)

9,000 3,000
8,000 2,500
7,000
2,000
6,000
1,500
5,000
4,000 1,000

3,000 500
2,000 0

Source: Company data; Broker research