BT Group (LON:BT.A): A Hidden Gem with an Earnings Turnaround on the Horizon?

The Undervalued Telecom Titan
BT Group (LON:BT.A), the UK's largest telecoms provider, has long been overshadowed by sector peers and macroeconomic headwinds. But beneath the surface, a compelling story is emerging: one-off costs totaling £822 million in the past year have artificially suppressed profits, creating a rare opportunity for investors to buy into a fundamentally improving business at a sub-£2 price. Let's dissect why BT's valuation metrics, cash flow trajectory, and strategic moves position it for a rebound in 2025/26—and why now might be the time to take a position.

The Drag of One-Off Costs—and Why They're Temporary

BT's reported net profit for FY2025 stood at £1.05 billion, a 23% year-on-year increase. But this figure excludes a staggering £822 million in unusual expenses, which acted as a deadweight on earnings. These costs, flagged as non-recurring, included restructuring charges and write-downs tied to legacy infrastructure and strategic shifts. While they shaved significantly off headline profits, they're not indicative of BT's underlying health.

Crucially, these expenses are unlikely to recur. Once these one-time drags are removed, BT's profit margins could expand meaningfully. Take the adjusted EBITDA: it rose 1% to £5.8 billion despite a 2.1% revenue dip (to £20.4 billion), driven by cost-cutting and operational efficiency. With £822 million of “noise” stripped out, the earnings picture becomes far brighter. Analysts estimate that removing these items would boost FY2025 profit by ~40%, implying a robust earnings rebound ahead.

Valuation: A Discounted Telecom Leader

BT trades at a price-to-sales (P/S) ratio of just 0.8x, compared to peers like Vodafone (1.4x) and Virgin Media O2 (1.3x). This discount reflects investor skepticism over BT's legacy issues and sector competition. But when you factor in BT's strategic focus on fiber broadband—a high-growth, high-margin segment—the valuation gap narrows dramatically.

BT's shares have hovered below £2 for much of June 2025 (e.g., £1.76 on June 9, £1.89 on June 18), offering a sub-£2 entry point. Historically, BT has traded at valuations closer to 1.0x P/S, suggesting significant upside if earnings normalize.

Cash Flow and Dividends: Stable, Not Spectacular, But Sustainable

BT's dividend yield currently sits at 6%, a mouthwatering figure for income investors. Critics will point to its history of dividend cuts—most recently in 2020—but the current payout ratio (based on adjusted earnings) is 55%, well within a sustainable range. With adjusted EBITDA growth and a deleveraging balance sheet (net debt fell 10% YTD), BT appears more capable of maintaining this yield.

Moreover, cash flow is improving. Operating cash flow rose 5% to £3.2 billion in FY2025, even as capital expenditures on fiber networks surged. This bodes well for long-term growth: BT plans to expand its ultrafast broadband coverage to 25 million premises by 2026, a move that could boost revenue from high-margin enterprise and consumer broadband services.

Risks to Consider

• Sector Competition: Rivals like Vodafone and Virgin Media O2 are aggressively expanding fiber networks.
• Economic Sensitivity: Telecom demand could soften in a recession.
• Regulatory Headwinds: BT operates in a tightly regulated industry.

However, BT's scale, brand recognition, and £20 billion+ annual revenue give it an edge in weathering these challenges.

The Bull Case: Earnings Rebound + Valuation Catch-Up

If BT's £822 million of unusual expenses are indeed one-offs, its FY2026 profit could hit £1.5 billion or higher, assuming stable operations. At that level, and with a modest P/S expansion to 1.0x, shares could re-rate to £2.50–£3, a 40–70% gain from current levels. For income investors, the 6% yield provides a cushion against near-term volatility.

Final Verdict: A Buy for Patient Investors

BT Group is a classic “value trap” candidate—if the earnings rebound materializes, it becomes a compelling growth-and-income play. The sub-£2 entry point, undemanding valuation, and improving fundamentals make it worth considering. Just ensure you monitor the fiber rollout progress and any recurring cost surprises.

Actionable Takeaway:
- Buy: For a 5%–10% allocation to telecoms, BT's mix of yield and growth potential is hard to ignore.
- Hold: If you're averse to sector competition risks or prefer faster-growing tech stocks.

Stay tuned to BT's Q3 updates and fiber milestones—they'll be the next catalysts for this undervalued gem.

Disclosure: This analysis is for informational purposes only and should not be taken as investment advice. Always conduct your own research before making investment decisions.