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( Concludes > > > )

. . . But it’s not that which knocks my socks off, because next to it Working Capital is lit up in red - and figures are in minus figures! This has been going on for 3 years - it’s like a spreading cancer! This is the first time ever I’ve seen it (now registered as Negative Working Capital) in minus figures.

I mean you turn your back for 5 minutes then come back to BT - Why hasn't this been picked up in the early years ie., 2022 was the first time in BT’s history that Working Capital has ended up in negative territory but only to the tune of a paltry wee -£138m.

However 2023 saw that situation deteriorate to -£935m and wait for it! 2024 is over a billion at -£1.099b ! Geezalou it’s getting worse by the year! - Give it a Covid jab or something!

This is what’s made the shorters salivate - not the debt - but cash-flow. Suddenly my mind goes back years and I’m reading pamphlets I’ve received from my bank, listing up research warning new sole traders like myself that businesses that don’t survive the first 3 years went into insolvency for the same reason - not because of losses or low profits, but because of such poor cash-flow they couldn’t pay their creditors!

I’ve seen enough, then just to rub salt in the wound I see that cash on hand appears lower than I recall. I see 2024 showing cash on hand as £2,780m

I check and it’s already in a steady yearly, downwards spiral into degradation

2019 = £4,880m

2020 = £6,641m

2021 = £4,652m

2022 = £3,456m

2023 = £3,940m

2024 = £2,780m

Going to stop here. Will post Fleccy’s calc’s on Sunday and a final summary of all the sections I’ve posted.

Currently my opinion is that the 5 years the CEO says she needs to clean up the cash flow mess, indicates there are no instant-relief levers left to pull,

no clever, magic tricks, no get out of jail cards left;

but instead I’m reminded of an old saying to prevent panic stricken people, flapping round, making a situation worse than needs-be by tinkering here, tinkering there, etc., but instead sometimes they just need to follow the old mantra of:

DON’T JUST DO SOMETHING - SIT THERE!

- She’s going to sit tight and wait it out until the next 5 years deliver their bounty right into her lap, isn’t she?

Plain and simple. That’s her plan. Who’ll be the first to blink - against that?

(Continues > > >)

. . . The Quick Ratio is reading 0.85

Not panicking as I’ve often seen stocks with 2 liquidity measures down and they carry on with business quite happily.

3) Finally I get to the Interest Cover metric. It measures if the company can actually pay its interest expenses from earnings alone. If ever it reads smaller than 1.0 it means and I quote: “the company is not generating enough profit from its operations to meet its interest obligations.”

In this instance it’s reading 2.36 so why is the computer raising it as a red flag? Maybe I should bang the computer on the side like an old TV? Instead I dig further and find this: “It is seen as a possible warning sign when interest coverage falls below 2.5 “

Well it’s only a little bit below and it does say “possible” not that it defo is a warning sign. However that’s all 3 red flags making the whole liquidity accountancy metrics take up arms against whoever is in charge of cash flow.

Incidentally there’s another quickly accessible PRICE TO CASH FLOW metric that is also lit up in red displaying 14.3 My guidance notes say lower is better and also below 10 is a must for safety!

I’m not overly concerned with that one as it depends on the industry and I use it every month to measure all my portfolios as a quick measurement and there’s plenty of 20’s and 40’s but must admit they’re my sin bin poor performers that I’m giving a full 5 years to recover before selling them if no improvements.

By now I’m thinking it’s failed every damn liquidity test, wonder if it’s the heavy Net debt so next I examine the leverage gearing. And that is so terrible it’s a joke.

Net Gearing perfection is no more than 15% but it’s a commonly accepted practice that companies who need to carry debt to function can safely increase their gearing up to 50% but anything above that, needs careful investigation. Well we all know BT’s Net Debt is bad - blame being forced to fast fibre the entire country! However Net Gearing is showing - over 165% !

Can’t catch a break. So now I move over to Net debt and this where I start throwing the towel in, on cash flow. Firstly, Net Debt is currently showing as £20.501b

But it’s not that which knocks my socks off, because next to it Working Capital is lit up in red - and figures are in minus figures! This has been going on for 3 years - it’s like a spreading cancer! This is the first time ever I’ve seen it (now registered as Negative Working Capital) in minus figures.

(Continues > > >)

This is the final section.

Going to try and fly through it, because it’ll leave time for the methodology of how these metrics are calculated (unimportant to most folk) to be placed right at the end for Fleccy, (answering a query post of his) and that frees me from the homework he set me of: “Details please” :)

(Quickie: Typo in the Revenue section).

It all hangs together but I didn’t type one of the year’s Revenue’s fully so when I typed ‘Revenue has broken through the ceiling/hurdle of £2b' - I had mistyped, as it should have read: £20 BILLION!) Still the point is made, if read quickly it may not get noticed at all:)

In analysing cash flow there are numerous metrics to be used for specific cash functions throughout the various liquidity summaries. I am cross referencing several, because in essence analysing cash items needs more than one metric to be clear on the position. (In doing so it became clearer why the CEO talks of a 5 year recovery period).

So, returning to BT after a couple of years away it hit me immediately when I scanned my eyes past the cash flow metrics - they were all red and numerically were displaying ‘orrible measurements. I investigated other distant cousins related to it like Net debt which lead to other items and finally a realisation that I had better radio-coms back to base with a: “Houston, we have a problem”.

I always check out the liquidity metrics automatically, and this time the 3 main liquidity metrics were lit up in red.

1) First up is the CURRENT RATIO and its registering a poorly 0.89 :(

It's used to measure the ability of a company to meet its current liabilities. A reading below 1.0 means fewer current assets than current liabilities and that BT may struggle to meet its current liabilities in the coming months.

The safety buffer should read AT LEAST 1.5 (but ideally higher).

That’s only one metric so I don’t panic. However it is a clear red flag encouraging one to dig deeper, so -

2) Next up is the: QUICK RATIO (You may have heard of this metric, often referred to by the more threatening name of: The Acid Test). This measures actual cash and it’s important this metric does not fall below a ratio of 1.0

The Quick Ratio is reading 0.85

Not panicking as I’ve often seen stocks with 2 liquidity measures down and those stocks can still carry on with business quite happily.

(Continues) >>>

Starting with the P/E ratio, I’m pleased to see the forward P/E ratio is looking like being achieved with a multiple of 7.9

BT always scored well on value, and pleasing to see the old P/E stalwart ratio indicating that even in the 140p area, that still transmutes into a cheap P/E7.9 valuation. (Skeptics will ask: Is it cheap for a reason other than value?)

So if market guidance is achieved for this current year, then the current price appears to offer excellent value. Indeed some DCF valuations have “fair value” at £6+

(£5 for Christmas is so passé now :)

Doesn’t mean that the SP will ever visit that, but buying/holding at any price below that is comforting as it’s not overpaying for a share in BT - if you believe in DCF valuations; Warren Buffett’s weapon of choice. I criticise the requirement for inserting 10 years forward estimations of interest rates into that calculation as I don’t think anyone can be that accurate.

However, Warren Buffet has a pithy response to that type of criticism in his margin of safety metric and says:

“Better to be roughly right than precisely wrong”.

Whatever! The P/E forward ratio still attaches a label to BT as a value stock. Other ways of valuing are by Price to Book value, and Price To Tangible Book Value. I have those to hand, but the P/E valuation will suffice for a shorter post.

It’s unfortunate that ROE (Return on Equity) and ROCE (Return On Equity Employed) are sitting at a mundane and unattractive multiples in single figures of:

ROE = 6.33%

ROCE = 4.99%.

I love to see them at least in double figures with a minimum 10%, preferably 15%, before buying, but they’re only reflecting the further work required to elevate BT to be regarded as a ‘quality’ level investment. It doesn’t pass any quality metrics. They’re okay but they’re not confidence inspiring.

BT is a cheap stock and that’s it. In the same period as in the previous post, ROE has pleasingly been in lowish double figures in 3 of those years, but ROCE has remained in single figures throughout, thus my conclusion on quality is that on these metrics BT is sluggish in converting profits into cash. Just have to see what the CEO does in her tenure. ROE has responded in some years so hope springs eternal. A cheap stock then. Investors are not being overcharged for the shares. All I can say.

Final post to come next is the Net Debts and Cash review. Maybe tonight rather than afternoon. So might come back tonight on that, but will get part of it posted, if I can’t get back sooner.

At last! And as we round the bend - it’s into the final straight :)

Haven’t completed reviewing BT as now need to read up on every statement/forecast the CEO has said, which I’ve only seen in snippets so far. This class action thing is new to me, too. So below is just to get a grip of trending Revenue & Earnings to bring me back up to speed.

All that follows is INMO (Don’t know why people insert H (honest) into that acronym; do they normally tell lies unless they insert an H? :)

Going to post in self-contained sections in my ‘brief’ balance sheet analysis so I can break off, if needed.

To reacquaint myself with BT, I like to go straight to my usual quick snapshot of front door to back door/ top to bottom analysis. Usually takes me 2 minutes - but writing those thoughts down as on here - Sheesh!

So from the top - Revenue - up or down?

Last few years and I’m still long faced - Bah! Nothing has changed - look:

REVENUE -

2019: £23,459m

2020: £22,824m

2021: £21,370m

2022: £20,845m

2023: £20,669m

So in my absence still producing no revenue growth. However what about the bottom line; earnings - Net Profit. Let’s see:

NET PROFIT -

2019: £2,159m

2020: £1,734m

2021: £1,472m

2022: £1,274m

2023: £1,905m

Again a retreating annual net Profit.

But what’s that in 2023? WOW!

Time to see what happened round about the CEO changeover time then, with all that bullish media reporting catching my attention, this is going to be a game changer I bet :

REVENUE -

2024: £20,835m

Yippee! Now there’s a first in many a year. It’s an increase in revenue at long, long, last. Great! Now let’s bring up the bottom line. My expectations are high:

NET PROFIT -

2024: £855m

WHAT! You’re kidding me! That’s terrible. So what are BT guidance & the market consensus forecasts for the future, as that 2024 bottom line result is god awful. (Haven’t factored in fast fibre costs at this point).

MARKET GUIDANCE FORECASTS

FOR REVENUE

2025: £20,852

2026: £20,932

Look at that - the increasing revenue achieved is expected to continue into future years - in modest increments; but increases all the same. (Return of smile)

Now I expect to be disappointed again with the forecast bottom line, so here goes:

MARKET GUIDANCE FORECASTS

FOR NET PROFIT

2025: £1,817m

2026: £1,846m

WOW! WOW! WOW! And wow again :) :) :)

Now I get what all the excitement is about.

{At this point in the analysis, I hadn’t reached the cash flow metrics}

“ I've only glanced through the results spreadsheet, but nothing dire jumps out at me, so Velo will have to clarify what he's concerned about. “

- - - - - - -

Most of the items in your post Fleccy, from where that query above arises in your 20th June post, will all be covered naturally in my summary post at the end of all these numerous queries. I think some of the metrics I use, will not be in BT’s public accounts. They’re helpful metrics (aka Refinitive) to help the private investor make better decisions on the true nature of what a company is prepared to reveal. That’s what the controversy over the introduction of the IFRS system was all about - it was to protect you and I - not BT. The authorities strong-armed the companies to reveal items they’d rather move around than reveal that particular year.

Also recheck near (the bottom para of yours) with past years, where you’re fine with the reveal that Cash on hand is only £2.8m!

Well I’m not.

It’s the lowest in BT’s history, or more correctly the last half dozen years or so. Haven’t gone back further - but pre-2016 the company was coining it - a roaring success. Awash with cash. That £2.8m is now all the cash they’ve got to run this ship - the lowest ever in their recent history! Not happy especially as historic positive Working Capital has disappeared down the plug-hole (for past couple of years now) and been replaced by red minus figure in the millions but last year passed into minus one £billion!

- so that asset has 100% disappeared! I’m straying into my final summing up - so will move on.

The credit ratings are great yes. I had already downloaded S&P’s/Moody’s et al tables of BT’s long term and short term credit ratings before discovering the new layout of BT website already have them proudly on display over there.

But that does not mean the cash flow is safe - because lenders do not lend solely on a company’s profitability - only their ability to repay - and on time. That’s top of their criteria list. Ability to repay and enough assets to seize just to get the value of their loans back, but in doing so, ripping the heart out of a company. Don’t be fooled by a splendid credit rating that all is well. Using that metric is a sleight of hand that says hey don’t look at cash flow - look at this over here - set of great credit ratings - we can get loans until the cows come home!

All it means is that the global lenders are satisfied that even if BT defaults and falls into financial difficulty there’s enough assets to grab via court orders and anyway, they know after several years receipt of repayments there’s a cut-off point where they’ve already got their initial loan money back, so all they’d lose is a little less profit than they expected. So BT would lose - but the lenders still end up in profit.

Enough! I’m Starting to go into ranting mode. Stopping now.

“ Velo I notice you agreed that the debt is huge, can you explain why? Because I take a different view. “

- - - - - - - - - - -

Hi Fleccy,

I’m not particularly up in arms over Net Debt.

Think I can roughly guess what your ‘different view’ is. Is it the fact that large companies especially those who are ex-growth, need to carry some Net Debt just to function? And that it’s a perfectly normal function of such companies operations? If so, I agree entirely. But what size of Net Debt is manageable and what isn’t?

Does that more or less sum up your different view?

(By the way, I would ask you to please leave Vodafone out of this as a comparison).

However, from the outset, surely you must admit to yourself, that the market regards the current Net debt as ‘huge’ by comparison to other companies who also carry Net Debt but less of it - as a %ratio to each Co’s M/Cap - but are perceived by the market to be generally all round more successful than BT, because they have a better record of historic long term, positive performance?

(Always Net Debt with me; never just Debt - as that metric is much lower than Net Debt)

I’m not ‘up in arms’ over the Net Debt but agree with any who describe it as huge. Further, I regard it as the “fault” of the Patterson-Poldark era. Does his overpaying for football rights etc., still form part of the Net Debt issue?

Patterson took over with Net Debt a shadow of what it is today at approx £6b/£7b By the time he handed over to Jansen he had overseen it rise to the £10b/£11b area. Unfortunately for Jansen, after the year he took over (I’m not sure if it was already baked-in or it was under Jansen’s guidance) - but one year later it virtually doubled to the £18b/19b area). And continued to rise in small increments to today’s £20b level (What I’m seeing currently, not £19.5b). To answer your question, yes, that’s how I see it. And if the big jump in one year flat in the Jansen era was not his doing, then maybe the introduction of the confusing IFRS carry-on is, which to this day has analysts complaining it makes nonsense of trying to compare historic performance to current performance. Or was it because the first of the fast fibre roll costs made it jump in that first Jansen year?

Not fussed with the Net Debt - only with the cash situation. I accept it.

With your exemplary, greater knowledge of BT than mine, I expect you may provide confirmation the big jump in Net Debt was due to the fast fibre roll out, yes/no?

However, it’s not a specific issue with me. The red flag of Cash flow is!

Nearly 1:00am- Geezalou!

"Velo, what about the details of your analysis?...

&

... There was some scaremongering in that post, so you really need to explain your thinking."

- - - - - -

Apologies Fleccy.

Want to do justice to your queries and give my full attention to them rather than recall from memory and give vague, bland responses. Hence couldn't fit in the time tonight to respond in detail. So opted for the quicker 'the phone call' post with what time was left to me.

You are now my first priority and I'd like to try and find the time respond to your first two (older) queries tomorrow. (Afternoon or evening).

Your query tonight is answered in part from within my fuller BT balance sheet cash summary analysis to come (Saturday now?)

So it'll be Saturday before I can respond to your v latest query, posted below.

PS. The CEO and that blandish 5 years before cash flow is fully under control again statement.

(Before reading on: I fully support and endorse the new CEO).

I contacted BT because if regulations allow, I would like specific details on what items they are targeting to get cash flow under control. Because matters are a bit like the election bulletins on TV.

When asked about the no tax rises for their new plans the politicians all say ah but it's been costed as an answer - with no figures supplied.

When pushed they can't give specific details only repeat the mantra: "it's all been costed".

My analysis so far leads me to believe cash is virtually running on fumes only. I hope to give my own specific details on Saturday - I hope, and not Sunday :)

PPS. First real negative media item out today says no more good news to come from BT for the foreseeable future.

I have not yet seen in the media any SPECIFIC detailed cash flow deficits articles, that I will be attempting to reveal this weekend ie., specific areas.

With bland media reports like tonight I'm wary of putting my findings out in public in case misused by persons of ill intent.

Emailing instead, maybe an option?

“ PS. Couldn’t believe how easy it was to be put through so fast, to the CFO. ”

= = = = = = = =

Adventures in how and why I got through so easily to BT's CFO:

Can’t remember which guru/book gave encouragement to picking up the phone to speak directly to CEO’s/Chairman etc., but the reason I remember is because their research revealed that almost no one ever phoned the CFO as most people wanted the CEO or the Chairman.

No one ever asked their opinion, it was always the stars of the company people wanted, and the advice concluded that’s why the CFO’s were often more than delighted that someone was interested in their opinion!

Here’s how it went:

Phoned BT and was put through to some central receptionist area because when I asked tentatively to "speak to Simon Lowth the CFO" - she replied “Who”? And I was immediately thrown.

Immediately I started babbling on about I have no appointment so I’m more than happy to phone back another time if he’s busy as I don’t want to interrupt him - but only if by chance he’s free for for one or two minutes tops.

Somewhere along that babbling she came back and announced: “Putting you through”.

And instantly a voice came on as clear as a bell, professional, polite and said: “Hi, Simon Lowth here”. I was stunned, I’d verbally pronounced his surname correctly.

As I introduced myself I hadn’t gotten as far as what I actually wanted from him before the most god awful radio signal type noise obliterated my hearing anything.

I finished talking and discovered he was already talking but I could only hear every third or fourth word. I adjusted the volume, still crackling. I turned off the loudspeaker. Nothing, so turned it back on and he was still speaking. I had turned into Mr Bean! The guys speaking and I’m playing with the damn phone!

I heard the odd word and put together what sounded like ‘important you don’t use that contact but this one’. And - “I will repeat it as (something)” then I heard him repeating “Delfas” or something so wrote it down as the screeching went on and on.

Once on the BT Investors site it turns out a Nick Delfas is listed under Investor Relations Team with the job title of: Director of Investor Relations.

There were quite a few other lesser titled people below him. Sighing that I’d been fobbed of with what I thought was a customer service 'my internet is down' link I idly clicked on Nicks biography - It says he was formerly managing director of Morgan Stanley, no less!

I perked up and read more. BT have thought of everything. Nick is the guy for all things financial and it appears he would have been the best choice all along. However, I had already fired off an an email to him before reading his bio, in which I asked him to pass the email on to Simon Lowth. But I will be happy enough if he replies.

Sorry about the length but I did say it was an adventure tale :)

Call for help -

If anyone can direct me to any articles/reports on BT's cash flow / liquidity issues I'd be v grateful.

Discovered some disturbing liquidity/Cash Flow issues, that are so dire that I'm going to directly contact the Finance Director tomorrow - it's not something I want to raise in a public and media attended shareholders Q&A session later this year, for obvious reasons.

Basically hoping for reassurance from the CFO in redirecting me to any relevant BT announcements of their handling of these issues.

Found a sentence in the CEO's trading result report where she acknowledges improvements being planned in cash flow, and a further comment in May (but might be the same meeting) where she announces a 5 year plan to attend to the matter of improving cashf low - so she knows it's a serious problem!

However, on paper the figures are dire. The comments so far from the management and the bare figures reported, do not synchronise with an "it's okay" outlook.

So it's a matter of explanations on liquidity, the hugemungous net gearing leverage, and the complete absence of any working capital that (even worse) has been replaced by negative working capital!

- and the lowest cash on hand I've ever seen. I'm quite concerned about all the cash side.

The CEO is a superbly qualified 'double' accountant in that she has the standard accountancy qualifications but also further global accountancy certificates under her belt.

However, her comments sound light on the issue to me. Is it because she's trying not to cause distress to shareholders?

There's certainly some good findings in BT's balance sheet to report but the cash side of things are a complete and utter nightmare to what I was looking at only a few years ago.

Very heavy workload with other stuff tomorrow, but will try and reveal the actual figures as soon as poss.

Will attempt to phone the CFO as not asking for anything that's not already in the public domain.

So anything in the media you have access to, on BT's cash flow status I'd more than appreciate a link as I may be over thinking this. Thank you.

" BT has (1) huge debt and (2) a massive pension fund deficit. There is no way the company can sustain such a (3) bloated workforce going forward. This is why a successful (4) bid is so urgently required."

----------

1) Agreed. Correct.

(To be picked up another time in a more in depth review).

New CEO has issued dates this will start reducing - Actual dates! If not known, I will be including them in a later review.

2) Incorrect.

It's just over half the average of when I was last posting on here years ago. In fact bonus points if anyone can reveal the year it was last this low, based on the pension deficit figure revealed in the latest annual results. You'll need access to long-ago historic accounts to find when it was this low/manageable.

Further bonus point if you can tell us from the last full accounts what the latest deficit is.

(It's significant but far lower than you think; gone are the days when the deficit was the largest of any company in the entire world! - Gone!)

3) Scaremongering.

The company already know that and are taking action.

10,000 redundancies already reduced and in hand - and only the start.

The company is already acting on reducing employee levels further. Nothing can stop it. It's an ongoing process.

New CEO already endorsing the 50,000 staff redundancies (repeat: 50,000!) announced by the previous CEO to be achieved in an organised manner - in all aspects - by the end of this decade. (Incidentally 30,000 are not direct BT employees but permanent work people paid via contracters). Was 99,000 employees when I was last posting here back in the day, so reading of 130,000 employee head count was a bit of a shock. However a case can be made that BT needed most of them whilst kickstarting 'build like fury' the fast-fibreing up of the nation under direct political govt pressure.

4) Untrue.

Takeover absolutely not a requirement for the redundancies to be fully achieved as it's already in progress.

Nor is one required to reduce costs. Company says CAPEX costs to start visibly reducing within 2 years.

Anyway keep up the scaremongering and encourage sellers as I'm looking for a cheap entry back in to BT.

Not desperate at the monent to hold BT.

In the meantime I will conclude my personal full review of BT - warts and all, and post my findings in due course, maybe not today, as haven't written anything down but the researched ratios, metrics, facts and figures are more or less already in me 'ead waiting to be forgotten unless I commit it to paper soon, otherwise things will slowly change to lesser or greater degrees to what I post if left too long. But don't really want to start reposting on a regular basis on here anyway.

I am not a holder. But maybe a returning holder after concluding my review.

Laters..... :)

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