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BT - Consumer division drives growth but pension deficit soars

Equity research team | 27 October 2016 | A A A
BT - Consumer division drives growth but pension deficit soars

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BT Group plc Ordinary 5p

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Consumer division drives growth but pension deficit soars

BT's half year results show second quarter underlying revenue's up 1% and adjusted earnings per share up 4%, with a strong performance from the consumer division. The group retains previous guidance to increase the dividend by a minimum of 10% this year and next and is increasing the interim dividend by 10%. The shares moved 1% higher on the news.

Our View

From a broadband and fixed line provider, BT has moved decisively to secure a 'quad-play' of services (mobile, TV, broadband and landline).

Offering customers Premier League and Champions League games at no extra cost has worked out nicely for the group. Since BT TV is packaged together with BT broadband, the group has been able to rapidly grow its TV and broadband customer base a and has enjoyed the lion's share of new broadband additions in recent times.

With a vast fixed line customer base already in place, the final piece in the jigsaw was the mobile market. The acquisition of EE, which completed earlier this year gives BT market leadership here too. With the realistic prospect of bundling all four services together, it is hoped that customer churn will decrease, which in turn supports revenue and profit visibility.

If the theory behind the quad-play strategy proves correct, BT are in an excellent position and cash flows should improve. However, how much of this cash can come back to shareholders is up for debate. In addition to the extra debt taken on to fund the EE deal, the pension deficit has ballooned after bond yields plummeted post-Brexit. With more cash likely to be needed to plug the pensions shortfall, the pressure is on the group to deliver a sound integration of EE and realise the advantages that the quad-play strategy should bring.

BT is aiming to grow the dividend by at least 10% this year and next. Market consensus suggests a dividend of 15.43p next financial year, offering a yield of 4%.

Second quarter results in detail:

The majority of BT's adjusted revenue growth of 35% can be attributed to the acquisition of EE, while weaker sterling has benefited the top line by £154m. Where appropriate, the figures below are adjusted for the acquisition of EE.

The Consumer division continues to grow, with average revenue per user (ARPU) up 9% to £38.8 per month, driven by broadband, BT Sport Europe and BT Mobile. Total revenue in the division is up 11% to £1.25bn, with earnings before interest, tax, depreciation and amortisation (EBITDA) up 23% as operating costs increased by less than last year. BT claimed 65% of the DSL and fibre broadband market net additions. The superfast broadband and TV customer bases increased to 4.5m and 1.7m respectively.

Within EE, total revenue was £1.28bn, with EBITDA of £282m. The total BT mobile customer base is now 30.2m and plans to roll out 4G+ continue to be rolled out.

Within Global Services, underlying EBITDA was flat, with revenue up 3%. Total order intake increased by 10% in the quarter, and a new contract was signed with Randstad and Banco de Sabadell.

Underlying EBITDA was down by 5% in the Business and Public Sector division, and by 2% in Wholesale and Ventures. Both divisions were impacted by contracts dropping out, although within Wholesale and Ventures this is partially due to previous contracts with EE.

Revenue from Openreach remained flat at £1.27bn, while EBITDA fell by 2% as operating costs increased by 4% reflecting the investment in clearing the Ethernet order backlog. 440,000 fibre broadband net connections were added, taking the number of homes and businesses connected to the fibre broadband network to 6.7m. Ultrafast broadband will be available to 500,000 homes and businesses by April 2017.

The net pension deficit at 30 September 2016 was a deficit of £9.5bn net of tax, compared with £6.2bn at 30 June 2016, due to both falling corporate bond yields and higher expected inflation. Net debt remains flat at £9.6bn.

Following allegations of inappropriate management behaviour at BT Italia, the group has written down the value of items on the balance sheet by £145m.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.