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BT Group - Plenty of moving parts

George Salmon | 28 July 2017 | A A A
BT Group - Plenty of moving parts

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BT Group plc Ordinary 5p

Sell: 154.75 | Buy: 154.85 | Change 3.80 (2.52%)
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BT's Q1 results are marginally ahead of prior expectations, and previous full year guidance has been reiterated. The group continues to expect full year ex-transit revenues to be broadly flat, with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £7.5-7.6bn and normalized free cash flow of £2.7-2.9bn.

The consumer division continued to grow this quarter, but new customer growth is slowing in both TV and broadband. The shares dipped 2.1% on the news.

Our view

There is something of a split developing at BT, with the soon to be merged EE, TV and broadband businesses racing ahead while the divisions serving businesses and the public sector splutter.

The group has done a neat job in its consumer facing businesses, transforming itself from a broadband and fixed line business into a provider of a wide variety of services. Through the acquisition of EE, BT now has a mobile offering of substance, and after investing in Premier League and Champions League football rights, the TV package is impressive too.

A common problem with telecoms is there isn't much to tie the customer in other than a low price. Bundling mobile, TV, internet and fixed line services together gives BT the chance to build a more loyal customer base. Customer growth has been impressive so far, and average revenue per customer is ticking up nicely. There is clearly the potential for some lucrative results.

However, much of the good work in the consumer division is being undone in real time. A dramatic profit warning in January revealed the scale of the improper accounting in Italy and detailed a material slowdown in the Business and Public Sector division.

Misdemeanours at Openreach (essentially BT unfairly delaying Ethernet installations) has led to fines and compensation payments, and there's also the cost of BT's restructuring programme. Hopefully the changes can make these parts of the business simpler, and BT ends up as a more flexible, digitally focused operation.

However, with another £225m set aside in Q1 results, these fines and costs are pushing £1.5bn. Combined with BT's substantial debt and pension obligations, it's perhaps unsurprising that the group has put the brakes on the dividend. Rather than increase the payout by 10% this year as previously planned, BT has adopted a rather less definitive 'progressive' approach. At present, the shares offer a prospective yield of 5.1%.

First quarter results

Revenue was £5.8bn, broadly flat on last year after transit and foreign exchange movements are excluded. The growth in the Consumer division (+7%) and at EE (+4%) was offset by mid-single digit percentage declines in the Business & Public Sector and Wholesale & Ventures businesses.

With costs relating to sports rights and the group's pension scheme both rising, adjusted EBITDA (excluding £318m of specific items) fell 2% to £1.8bn.

Within the £318m of specific items is a charge of £225m to settle warranty claims with Deutsche Telekom and Orange arising from the previously reported issues in Italy, and £52m of restructuring costs. These are associated with the ongoing transformation of divisions including Technology, Service & Operations and Global Services.

Net debt of £8.8bn represents a decrease of £122m in the quarter, and is now £762m lower than this time last year. The pension deficit has increased slightly, to £8bn net of tax.

Looking ahead, the UK Public Sector business continues to experience headwinds, albeit at a lower rate than at the end of 2016/17. Conditions also remain tough in international corporate markets.

BT is bringing together its Consumer businesses and EE, which will be headed up by Marc Allera, currently CEO of the EE business.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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