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BT - Profits dip, but EE customer growth continues

George Salmon | 2 November 2017 | A A A
BT - Profits dip, but EE customer growth continues

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BT Group plc Ordinary 5p

Sell: 157.30 | Buy: 157.40 | Change 0.15 (0.10%)
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BT's half year results are broadly in line with expectations. The interim dividend is held flat at 4.85p per share, although the 'progressive' dividend policy is maintained. Going forwards, the group will target paying out 30% of the previous full year's dividend at the half year stage.

The shares rose slightly on the news.

Our view

There's something of a split developing at BT. The soon to be merged EE and Consumer businesses are racing ahead while the divisions serving other businesses and the public sector splutter.

BT has done a neat job on the consumer side. 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 tying the customer in other than a low price, and capital requirements mean high fixed costs. 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.

However, much of the good work in the consumer division is being undone in real time.

Misdemeanours at Openreach (essentially BT unfairly delaying Ethernet installations) have led to fines and compensation payments. Going a bit further back, we had a dramatic profit warning in January that revealed the scale of the improper accounting in Italy and detailed a material slowdown in the Business and Public Sector division.

The Global Services business is also under pressure, and is one of a few areas BT is shaking up in a restructure. These changes should bring annual cost savings of £400m, and can hopefully help BT become a more flexible, digitally focused operation.

While the exact benefits of the restructure are uncertain, we do know the total bill for restructuring costs and recent fines is around £1.5bn. These costs, plus BT's substantial capital expenditure, sizeable debt and big pension deficit mean it's no surprise the group has put the brakes on the dividend.

Rather than increase the payout by 10% as previously planned, it has adopted a rather less definitive 'progressive' approach. At the moment, analysts are expecting this to translate into growth in the low to mid-single digits.

While the dividend may not increase at superfast speed, recent falls in the share price have pushed the prospective yield up to 6%. There's clearly work to be done, but for those prepared to see if BT can get back things back on track, that starting yield will be an alluring prospect.

Half year results:

Revenues were flat at £11.8bn, with underlying operating costs up 1%, reflecting investment in customer experience and sports rights, including Ashes cricket and Premier League football, along with higher pension costs and business rates. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 3% to £3.6bn.

Within the divisions, only EE managed to deliver higher profits, with EBITDA rising 17% to £661m, boosted by the 'more for more' strategy. In Q2, a rise in the number of contracted customers marginally offset a fall in pay-as-you-go, leaving the total at 29.7m.

Openreach and BT Consumer both saw revenues rise, but higher operating costs saw low single digit declines in EBITDA, to £1.2bn and £478m respectively.

EBITDA in Business & Public Sector fell 7% to £694m, with Wholesale and Ventures down 10% to £361m. The decline in both divisions was driven by a drop in revenue.

The biggest decline in profitability was in Global Services. Revenue fell across the board, with order intake of £0.9bn down 38% in Q2. A slight fall in operating costs couldn't prevent EBITDA dropping 39% to £154m.

Normalised free cash flow was £1.2bn, down 7% due to lower profits, working capital phasing and higher capital expenditure. Net debt remained broadly flat on last year, at £9.5bn. The net pension deficit is £7.7bn, which rose slightly over the half.

Guidance for the full year is left unchanged. On an underlying basis, the group expects revenues to be broadly flat, EBITDA to come in between £7.5bn and £7.6bn and free cash flow to be around £2.7bn - £2.9bn.

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.

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.